The Bank of Russia has cut rates more than expected, from 14 per cent to 12.5 per cent, citing “persistent risks of considerable economy cooling”.
Although a cut was widely expected, consensus had put the reduction at one percentage point, taking the country's base rate to 13 per cent. Rates peaked at 17 per cent in December
Directors of the central bank have forecast that consumer price growth will “slow down faster than expected”, with annual inflation dropping to less than eight per cent year-on-year, reaching the target four per cent in 2017.
Rates will drop further as the pace of inflation slows.
There are a number of short-term factors – including external trade restrictions, lower consumer demand and contracting real income – that are contributing to this.
The rouble has gained 36 per cent against the US dollar since the start of February, having tumbled move than 52 per cent between mid-June and mid-December when concerns over the Russian economy were at their height.
The Bank is also expecting “considerable GDP contraction” for the first quarter of 2015, and a rise in the unemployment rate.
“According to Bank of Russia estimates, the labour market adjusts to the new conditions mostly through wage decrease and part-time employment,” it said. “These factors, alongside with a decrease in retail lending, will result in further decline in consumer activity.”
“Fixed capital investments will continue to contract due to persistently high economic uncertainty, deterioration of companies’ financial performance, tighter lending conditions, limited ability to replace foreign sources of funding with domestic ones given shallow Russian financial market, as well as high prices for imported investment goods. Sluggish domestic demand will contain imports.
“Net exports will be the only factor to make a positive contribution to the output growth.”
The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for 15 June 2015.