Russia unexpectedly cut its short-term interest rates by 25 basis points to 9.75% as inflation had subsided faster than had been foreseen. Most economists had expected the Bank of Russia to keep rates where they were. The cut was the first in seven months.
The most likely reason for the surprise reduction was to slow the rather fast appreciation of the Russian currency, the ruble. An improving Russian economy and the slow ratchet upwards of the price of crude oil on international markets, had brought the ruble down from its low during the crisis of 80 to the USD to a 57 handle. A rising ruble has hurt the prospects of Russian exports, which had been given a lift as the currency devalued during the crisis.
“Bank of Russia admits the possibility of cutting the key rate gradually in coming 2Q-3Q” the bank said in a statement while noting that it still plans to keep monetary policy moderately tight as inflation risks have declined, but remain elevated. It also said the risk of missing 2017 inflation target of 4% have “slightly abated,” reported Zero Hedge.
With inflation waning to well below 5% on an annual basis, the bank was able to ease rates and further stimulate nascent Russian economic growth. The Bank of Russia also renewed its president’s term for another five years.