By Andrey Ostroukh and Alexander Kolyandr
MOSCOW--Russia's central bank unexpectedly cut its key interest
rate by two percentage points on Friday, saying a sharp economic
slowdown would soon ease inflationary pressures, prompting the
ruble to fall.
The ruble weakened sharply against the dollar in response to the
move, with the dollar jumping to 72 against the Russian
currency--the ruble's lowest level since December.
Economists, who had been expecting the central bank to hold
rates steady amid surging inflation and continued tensions between
Moscow and the West, were surprised by the move. Some said it
raised questions about the central bank's independence after its
monetary-policy chief was replaced early this month in the wake of
criticism of its handling of last year's ruble crisis.
"There is lack of consistency in [central bank] actions and
complete unpredictability in their actions, which is not 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.
In its statement, the central bank said its emergency rate rise
on Dec. 16--a 6.5 percentage point increase that came as the ruble
was in free fall--had worked as expected, allowing it to now reduce
its key rate to 15% from 17%.
The central bank said that while inflation--now running at
13.1%--is likely to continue to rise in the coming months, the
deepening slowdown in the economy will bring down price growth
later in the year. However, inflation won't fall below 10% until
January 2016, the bank said.
The central bank painted a dark picture of Russia's economic
outlook, warning that a "substantial contraction in output" is
looming 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 of consumer credit would "reduce consumer
activity." The central bank forecast the Russian economy to
contract by 3.2% in the first half of this year, compared with
growth of 0.6% for all of 2014.
Unlike in previous months, the central bank's statement provided
no outlook for monetary policy and omitted its previous wording
that it would be ready to cut rates when inflation slows down.
The central bank has come under heavy 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.
In January, central bank Chairwoman Elvira 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.
The bank's "credibility among market participants was lost in
December and it feels like the [central bank] does not pay much
attention to it anymore," said Alexey Pogorelov, an economist at
Credit Suisse in Moscow. "We do not 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 market.
"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