By Andrey Ostroukh and Alexander Kolyandr
MOSCOW--Russia's central bank surprised financial markets with a
two-point cut in its key interest rate Friday, sending the ruble
lower even as the bank said the currency was showing signs of
stabilization.
The bank had come under heavy pressure from industrialists and
commercial bankers to lower the rate, which had been raised 6.5
points to 17% at an emergency meeting in December as the ruble was
in free fall. But with inflation continuing to rise and prices of
oil, Russia's main export, still weak, the ruble has remained under
pressure. Fears of further western sanctions amid escalating
violence in Ukraine have added to that pressure.
But Russia's Central Bank Chairwoman Elvira Nabiullina said
Friday's move --the first easing after six rate increases last
year--was aimed at "balancing the goals of subduing inflation and
restoring economic growth." Describing the December increase as "an
emergency measure," she noted that the new rate of 15% was still
"rather high."
When it announced the rate cut earlier Friday, the central bank
said that a sharp economic contraction would ease inflationary
pressures later this year.
But many investors said the unexpected cut seemed to send a
worrisome signal about the central bank's ability to withstand
pressure from the Kremlin and powerful domestic interests to boost
growth with easier money, even at the expense of rising inflation
and pressure on the currency. The ruble fell beyond 72 per dollar
after the announcement, its lowest level since the crisis days in
December.
Concerns about central-bank independence were heightened earlier
this month when Ms. Nabiullina replaced her monetary policy chief,
economist Kseniya Yudaeva, with a banking-industry veteran, Dmitry
Tulin. Ms. Yudaeva, long-considered a close ally of Ms. Nabiullina,
was given responsibility only for analysis and forecasting.
Officials denied the move undermined the bank's independence, but
in recent weeks, even top cabinet members have criticized the bank
for what one called "maniacal" devotion to the principle.
"There is lack of consistency in (central bank) actions and
complete unpredictability in their actions, which isn't good for
the markets," said Dmitry Petrov, an economist at Nomura. "We don't
know whether it has been the pressure or change in the governance
that resulted in this shift, but it may prove very costly in terms
of their ability to achieve inflation targets," he added. Mr.
Petrov also warned the move could raise fears of capital controls,
something the government has so far ruled out.
Government officials welcomed the easing on Friday. Finance
Minister Anton Siluanov, who criticized the central bank for being
slow with monetary tightening late last year, this time praised the
rate decision. He said that the rate cut was "absolutely correct
and balanced," adding that the "exchange rate has reached
equilibrium."
In her comments, Ms. Nabiullina also suggested the bank was
working together with the government, which this week approved a
2.34-trillion-ruble ($33.9 billion) program to ease the effects of
the economic crisis. Ms. Nabiullina said Friday's rate cut was
aimed at restarting lending to industry, "which is one of the goals
of the anticrisis plan."
In its rate-cut statement Friday, the central bank said that
while inflation--now running at 13.1%--was likely to continue to
rise in the coming months, the deepening slowdown in the economy
would bring down price growth later in the year. However, inflation
won't fall below 10% until January 2016, the bank said.
The central bank warned that Russia's economy faced a
"substantial contraction in output," because of the drop in oil
prices and western sanctions, which have led to "the closure of
external financial markets for Russian borrowers."
It warned that investment would decline, while falling real
incomes and tightening consumer credit would "reduce consumer
activity." The central bank forecast that the Russian economy would
contract by 3.2% in the first half of this year, compared with
growth of 0.6% during the whole of 2014.
The central bank has come under intense pressure in recent weeks
from industry and commercial banks to lower rates. Even President
Vladimir Putin offered only mixed support for the central bank's
handling of the ruble crisis, saying some of its moves were
belated.
The bank's "credibility among market participants was lost in
December and it feels like the [central bank] doesn't pay much
attention to it anymore," said Alexey Pogorelov, an economist at
Credit Suisse in Moscow. "We don't agree the [central bank]
succeeded in stabilizing inflation and devaluation expectations, as
it noted in the statement. The ruble's reaction provides the best
picture."
The central bank didn't immediately respond to a request for
comment on allegations that its independence had been
compromised.
Economists said the ruble could face further pressure in the
coming weeks if other western credit-rating firms join Standard
& Poor's, which downgraded Russia to 'junk' level earlier this
month. With violence in Ukraine continuing to rise, pressure for
more western sanctions could also hurt the currency.
"The ruble is still vulnerable in the current environment, but
perhaps the [central bank] judged that the base rate at 15% should
provide sufficient insulation for the ruble," said Piotr Matys, a
rates strategist at Rabobank.
Chiara Albanese in London contributed to this article.
Write to Andrey Ostroukh at andrey.ostroukh@wsj.com and
Alexander Kolyandr at Alexander.Kolyandr@wsj.com
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