Via Financial Times

Russia’s central bank has cut its key interest rate from 7 to 6.5 per cent on Friday, citing a sharp drop in inflation amid tepid economic growth.

The cut was the fourth this year, but came in at twice the size of the three previous ones, surprising a majority of analysts surveyed by Reuters who had expected a 0.25 per cent reduction. 

The reduction was the largest in two years and took rates to their lowest level since before the 2014 Russian financial crisis, when governor Elvira Nabiullina raised them to 17 per cent and switched the rouble to a free float.

“The [Central Bank of Russia’s] decision can be explained in the light of lower inflationary risks set against tight budgetary policy, but you still can’t say this was expected a month ago, never mind half a year ago,” Natalia Orlova, chief economist at Alfa-Bank, said in a note. 

The central bank’s move was the first sign from Ms Nabiullina that she is willing to abandon her conservative fiscal policy after officials sparred for months over dire warnings about Russia’s growth prospects, and it opened the door to future cuts.

Russian president Vladimir Putin is struggling to boost growth amid an economic slump that has seen real incomes fall for five straight years, sending his approval ratings to record lows.

Ms Nabiullina enjoys Mr Putin’s strong backing for her handling of the 2014 financial crisis, but has faced calls from other officials to cut rates in an effort to kick-start the moribund economy.

“Disinflationary risks exceed pro-inflationary risks in the short term,” the central bank said in a statement.

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Chris Weafer, a partner at consultancy Macro Advisory, said Ms Nabiullina “has come under government pressure to ease the interest rate in order to reduce the cost of debt service for households, in particular, and to support the state’s efforts to try and increase the rate of economic growth. [They] are calling for lower rates as quickly as possible to try and revive spending and investment.”

The central bank revised its prediction for inflation at the end of this year downwards, from a range of 4 to 4.5 per cent to 3.2 to 3.7 per cent. That shift came after its expected rate of price growth slipped below its 4 per cent target months earlier than had previously been expected, hitting 3.8 per cent in October.

Russia’s economy ministry forecasts that inflation will fall to 3.2 per cent by year-end, while the finance ministry says it could sink as low as 2.8 per cent.

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At the same time, weak growth led the central bank to leave unchanged its expectation of just a 0.8 to 1.3 per cent increase in gross domestic product this year. It expects growth to rise to 2 to 3 per cent by 2022 thanks to a Kremlin-backed spending programme and a concurrent plan to spend some of Russia’s savings from surplus oil revenue.

“The central bank is quite right in saying that the interest rate is not the main problem for the economy,” Mr Weafer added. “Consumers and businesses have all lost confidence in the economic outlook and even cheaper interest rates will not alter that.”

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