Russia Unexpectedly Reduces Its Main Interest Rate

Russia unexpectedly reduced its benchmark rate on Friday, suggesting that policy makers believed a global economic slump posed greater risks than inflation to the country, the world’s biggest energy exporter.

The refinancing rate was reduced to 8 percent from 8.25 percent, Bank Rossii said in a statement on its Web site. The move was forecast by two of 22 economists in a Bloomberg survey. Separately, the difference between the main lending and deposit rates was cut a quarter-point to 1.25 percentage points, the narrowest ever.

Russia joins nations like Brazil and Indonesia that are easing borrowing costs to manage the fallout from a slowdown in China and Europe’s deepening debt crisis. Prime Minister Vladimir V. Putin, who will run for president next year, is seeking annual expansion of as much as 7 percent while the central bank plans to reduce inflation to at least 5 percent by 2014.

“The central bank noticeably softened the tone of its statement, signaling that it will pay more attention to economic risks going forward,” Dmitry Polevoy, chief economist at the ING Group in Moscow, said Friday.

The ruble extended gains against the dollar after the announcement and closed 0.5 percent stronger at 31.21 in Moscow. The currency has weakened 6.8 percent against the central bank’s target dollar-euro basket since the end of July.

Investors are betting interest rates will remain unchanged over the next three months, compared with expectations of as much as 21 basis points of increases on Nov. 24, according to forward-rate agreements tracked by Bloomberg.

The central bank chairman, Sergey Ignatiev, said on Thursday that he was surprised by the slow inflation even as the ruble’s recent slump might affect price growth next month. Risks to economic expansion “are strengthening” while inflation is at an acceptable level, Alexei Ulyukayev, a central bank first deputy chairman, said last week.

The overnight auction-based repurchase rate, Bank Rossii’s main lending tool, will stay at 5.25 percent and the overnight deposit rate, used to withdraw cash, will increase a quarter-point to 4 percent.

Russia’s ruble bonds due in 2016 rose, pushing the yield 0.04 percentage points lower to 8.12 percent.

The shortage of rubles in the banking system since September will help curb inflation next year, policy makers said in the statement. The government’s decision to delay price increases for utilities to July from January will bring a “substantial slowdown in the annual inflation rate” early next year, according to the statement.

Inflation eased to 6.4 percent from a year earlier as of Dec. 19, down from 6.8 percent in November, the regulator said. Year-to-date price growth was at 6 percent as of that date, the government said this week.

Record-low inflation may help Mr. Putin solidify voter support after his ruling United Russia party won less than half of the vote in a Dec. 4 parliamentary poll. Tens of thousands of people joined protests in Moscow after accusations of ballot-box stuffing.

Inflation at the lowest since August 2010 is bolstering purchasing power and helping shelter the economy from a slowdown in Europe. Gross domestic product may expand 4.5 percent this year and 3.7 percent in 2012, according to the Economy Ministry. Even so, more than half of Russians still see the inflation level as “very high,” a poll showed last month.

Article source: http://www.nytimes.com/2011/12/24/business/global/russia-unexpectedly-reduces-its-main-interest-rate.html?partner=rss&emc=rss