By Andrey Ostroukh and Alexander Kolyandr
MOSCOW--Russia's central bank surprised financial markets with a
two-percentage 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.
The White House pointed to the central bank's move as evidence
of the negative economic impact on Russia of President Vladimir
Putin's "expedition into eastern Ukraine."
"We're hopeful that as these cost mount, that it will
prompt...President Putin to re-evaluate his strategy," White House
press secretary Josh Earnest said.
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, 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 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 a "maniacal" devotion to the
principle.
"There is lack of consistency...and complete unpredictability in
their actions, which isn't good for the markets," said Dmitry
Petrov, an economist at Nomura, said of the bank. "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.
Russian government officials welcomed the easing. Finance
Minister Anton Siluanov, who criticized the central bank for being
slow with monetary tightening late last year, 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 the rate cut was aimed at
restarting lending to industry, "which is one of the goals of the
anticrisis plan."
In its rate-cut statement, 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
Putin offered only mixed support for the central bank's handling of
the ruble crisis, saying some of its moves were belated.
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 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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