(Bloomberg) — Russia's central bank lowered its main interest rate as concern over a looming recession took precedence over stabilizing the ruble and taming runaway inflation. The ruble weakened beyond 70 against the dollar.
The one-week auction rate was cut to 15 percent from 17 percent, the central bank said in a statement on its website Friday. Only one of 32 economists in a Bloomberg survey forecast a decrease, predicting a move to 9.75 percent. The rest saw no change.
"Further inflation pressure will be contained by a decrease in economic activity," policy makers said in the statement. The emergency rate increase last month has "resulted in stabilization of inflation and depreciation expectations to the extent the Bank of Russia expected."
Governor Elvira Nabiullina is bowing to calls for policy easing from officials and business leaders including billionaire Oleg Deripaska, who've warned that economic activity will grind to a halt after last month's rate increase from 10.5 percent, the biggest since 1998. The central bank, which last cut its main lending rate in December 2011, raised the benchmark six times last year to tame inflation kindled by U.S. and European sanctions over Ukraine and Russia's countermeasures.
The ruble traded 2.7 percent weaker at 70.5770 as of 1:51 p.m. in Moscow.
Government Pressure
"This was an unexpected decision since inflation remains high and the ruble continues to weaken," Vladimir Bragin, head of research at Alfa Capital in Moscow, said by phone. "The central bank is under pressure from the government, which is facing a slowing economy and needs measures that would stimulate investments and enhance conditions for the banking system."
Worsening tensions in Ukraine are prompting threats of stiffer sanctions as oil heads for its seventh straight monthly decline, forcing the economy of the world's largest energy exporter to the brink of a recession.
Russia's gross domestic product may shrink 4 percent in 2015 and grow 0.5 percent in 2016, according to economists polled for another Bloomberg survey.
Consumer-price growth surged to 11.4 percent from a year earlier in December, the fastest pace in more than five years, and may accelerate to between 15 percent and 17 percent in March or April, according to Deputy Economy Minister Alexey Vedev.
Emergency Increase
The regulator shifted to a free-floating exchange rate ahead of schedule in November and burned through about $ 88 billion of reserves last year to prop up the ruble. Its emergency rate increase, announced in the early hours of Dec. 16, has yet to calm the currency market.
Russia is now left with "more limited" monetary-policy flexibility, Standard & Poor's said Jan. 26, when it cut the country's sovereign credit rating below investment grade for the first time in a decade.
Highlighting policy makers' challenges, Russian President Vladimir Putin's economic aide Andrey Belousov said Jan. 15 that doing business is "impossible" at the current level of interest rates.
Belousov's comments came a day after the Bank of Russia put Dmitry Tulin in charge of monetary policy, the biggest leadership shakeup since Nabiullina took charge in June 2013. The move was in response to scolding from Putin, who said policy makers should have reacted quicker to the crisis.
"The central bank is still taking care of the banking system," said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, the only economist in the Bloomberg survey to predict a rate cut. "They know price stability will only come if you have financial stability. That is why they lowered the rate in order to give banks some more breathing space."
To contact the reporters on this story: Anna Andrianova in Moscow at aandrianova@bloomberg.net; Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net
To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Paul Abelsky, Michael Winfrey
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