Russia: Central Bank cuts interest rates to balance rising inflation and deteriorating economic growth
January 30, 2015
Due to a rapid deterioration of the economy and falling oil prices, the Russian Central Bank surprised the markets by cutting the one-week repurchase rate from 17.00% to 15.00% at its scheduled meeting on 30 January. The Central Bank had unexpectedly hiked the main monetary policy rate to an astonishing 17.00% in December 2014 in response to the freefall of the ruble and a potential currency crisis. Most market analyst had expected the Bank to stay put in this meeting in order to maintain interest rates high to help strengthen the currency. However, the Central Bank claimed that its decision was intended to balance the goal of curbing inflation and restore ailing economic growth.
In its accompanying statement, the Central Bank recognized that the economy eked out growth in the final quarter of 2014 and according to preliminary data the Bank estimates that the Russian economy grew 0.6% in the full year 2014. However, high interest rates are choking the banking sector and rapidly cooling the economy. Bank Rossii added that, “further substantial decrease of output is expected amid the deterioration of external conditions resulting from oil price drop and foreign financial markets inaccessibility for Russian borrowers.” The Bank went on to recognize that it expects economic activity to contract 3.2% in the first half of 2015 compared to the same period last year.
Regarding consumer price developments, Bank Rossii indicated that inflation rose notably at the end of 2014 due to a considerable depreciation of the ruble against the U.S. dollar (and other major currencies). The Bank expects inflation to continue rising in the coming months fuelled by the persistent weakening of the ruble. The Bank foresees that inflation will reach its peak in Q2 2015 before falling to under 10% by January 2016. This is due to slower growth in domestic demand on the back of weak private consumption, a contraction in fixed investment and lower public spending. The next monetary policy meeting is scheduled for 13 March.
Author: Ricardo Aceves, Senior Economist