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Bank of Russia, the country’s financial megaregulator, has just announced the key interest rate will be reduced to 14% from March 16, 2015.
The move represents a cut from the level of 15%, which was introduced on February 2, 2015. That, in itself, represented a cut from the level of 17%, introduced on December 16, 2014, with the radical move back then sending the Russian Rouble down against the US dollar and the Euro, leading to a subsequent shortage in liquidity at many FX brokers and forcing some companies to suspend trading with RUB instruments altogether.
Today’s decision by the Bank of Russia is in tune with most analysts’ forecasts. The markets had expected a small reduction in the interest rate, especially taking into account the stabilization of the Rouble exchange rate against the USD and the EUR in February 2015. And yet, the inflationary pressures in Russia are still high, so expectations had been that the Megaregulator would not opt for a drastic cut.
In its announcement today, the Board of Directors of the Bank noted that the decision will not pose an additional threat of increased inflationary pressure. According to the Bank’s forecast, the current monetary policy and low economic activity will be conducive to the slowing of annual consumer price growth to 9% over the year (March 2016 on March 2015) and to the target of 4% in 2017.
The regulator concedes that structural factors continue to exert a restraining influence on economic growth, with its its slowing becoming more and more cyclical. Weak economic activity will be conducive to inflation reduction. Further decrease in output is expected amid persistently low oil prices and foreign capital market inaccessibility for Russian borrowers. Fixed capital investments will continue to contract due to high prices for the imported investment goods, deterioration in companies’ financial performance, tighter lending conditions, and high economic uncertainty.
According to the Bank of Russia, GDP will fall by 3.5-4.0% in 2015.
The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled for 30 April 2015.
The official announcement by the regulator can be read here.