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Russian central bank’s key rate cut to 12.5% to facilitate economic growth — experts

April 30, 2015, 20:57 UTC+3 MOSCOW
The Russian regulator made a decision at its interest rate policy meeting to lower the key rate by 150 basis points to 12.5% amid slowing inflation and the strengthening ruble
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Russian central bank

Russian central bank

© TASS/Pavel Smertin

MOSCOW, April 30. /TASS/. The Russian Central Bank’s decision to cut the key rate to 12.5% from May 5 will contribute to economic growth and facilitate the banking sector’s funding, experts polled by TASS said on Thursday.

The Russian regulator made a decision at its interest rate policy meeting on Thursday to lower the key rate by 150 basis points to 12.5% amid slowing inflation and the strengthening ruble.

At the same time, the regulator’s monetary policy easing will not affect the ruble and inflation dynamics as the market expected this move, the experts said.

All the 15 analysts polled by TASS said they expected the rate cut by 1-2 percentage points while eight of them were able to accurately predict the new rate at 12.5%

Gazprombank Chief Economist Maxim Petronevich who gave an exact forecast for the Central Bank’s April 30 decision said the predictability of the regulator’s move was evidence that the dynamics of Russia’s major macro-economic indicators suited the policy makers.

"The Bank of Russia’s moves close to the expectations suggest that the key parameters such as GDP, inflation, the unemployment rate and the exchange rate generally suit the regulator," the expert said.

Supporting the economy

For the third consecutive policy meeting, the regulator said the balance of risks was shifted towards recession threats. In comments on its decision, the Central Bank again said "inflationary risks are weakening while the risks of a considerable cooling of the economy remain."

Recession risks have been in the focus of the Central Bank’s attention since early 2015, prompting the regulator to cut the key rate twice, from 17% to 14% as of March 13.

The monthly rates of the GDP fall are now slowing. GDP net of seasonal factors fell by 2.5% in January on December whereas this decline slowed to 1% in February and 0.5% in March, Petronevich from Gazprombank said.

At the same time, the regulator’s monetary policy easing that started from February will have its effect on the economy only in the third-fourth quarters, the expert said.

Annual inflation is also slowing gradually, edging down to 16.5% from 16.7% from the previous policy meeting, he said.

Russia business community also responded positively to the Central Bank’s key rate decision.

Business Russia Association Head Alexei Repik said the regulator’s decision responded to the interests of business in the country.

"We’re entering the phase of predictability and rationality in the regulator’s actions and this is the strongest signal," the expert said.

Apart from economic growth, the Central Bank’s decision will support the banking sector as well, Director of the Sberbank Center for Macro-Economic Research Yulia Tseplyaeva said.

"The big crisis, which was looming at the end of last year, fortunately, has not materialized. In this regard, the rate cut is a very positive step, which helps reduce the cost of funding for Russian banks amid restricted access to global capital markets," she said.

"In the short term, this decision can make ruble liquidity cheaper, which will lend certain support to banks," BCS Financial Group Chief Economist Vladimir Tikhomirov said.

Keeping the ruble stable

The ruble will not be affected by the Central Bank’s decision, economists said.

BCS Financial Group Chief Economist Vladimir Tikhomirov said the Russian currency may switch to the range of 51-53 rubles to the dollar from the 50-52 range after the regulator’s key rate decision but no collapse of the national currency should be expected.

"I don’t expect the ruble slump as it is supported by the oil price," he said.

"The June futures on Brent oil blend are currently trading at $66.14 per barrel at London’s ICE, which is considerably above the Central Bank’s forecast for this year [$50-55 per barrel]," the expert said.

Before the Central Bank’s interest rate policy meeting, the US dollar was trading close to 52 rubles on the Moscow Currency Exchange while the euro was almost approaching the mark of 58 rubles, whereas after 1:30 p.m. Moscow time (10:30 GMT), the dollar fell sharply to 51.12 and the euro to 57.16. Therefore, the Russian currency market expected a larger rate cut, analysts said.

"If we look at the reaction, the markets expected a greater reduction, like I did. This news [about the rate cut by such an amount] is sooner positive for the ruble than negative," Tseplyaeva from the Sberbank Center for Macro-Economic Research said.

Nevertheless, foreign currency again started to appreciate against the ruble as of 3:50 p.m. Moscow time and the dollar climbed by 67 kopeks from yesterday’s close to 51.72 while the euro rose by 92 kopeks to 57.68.

Analysts do not expect inflation to accelerate after the key rate cut. Renaissance Capital Chief Economist Kuzmin said the rate had been lowered by 1.5 percentage points without detriment to the medium-term inflation dynamics.

Expects expect the Russian Central Bank to continue rate cuts, about which the regulator mentioned in its press release.

"The Bank of Russia is ready to continue lowering the key rate as inflationary risks weaken further," the press release said.

Economists expect the key rate to go down to 10% by the end of this year.

"We still believe that the course towards the rate cut will remain," Chief Economist for Deutsche Bank’s Russia Office Yaroslav Lisovolik said.

"We keep our expectations that the rate may be lowered to 10% as of the end of this year and to 6.5% as of the end of 2016," Kuzmin from Renaissance Capital agreed.

The Russian Central Bank will hold its next interest rate policy meeting on June 15.

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