Bank of Russia Cuts Key Interest Rate by Greater-than-Forecast 150 Basis Points

April 30, 2015

Following up on reductions of 200 basis points on January 30 and 100 bps announced March 13, the Central Bank of Russia’s key repo rate was slashed today to 12.5% from 14.0%.  This brings the drop to 450 basis points and trims last year’s cumulative tightening of 11.5 percentage points by 39%.  A statement was released asserting that inflation, though elevated at 16.5%, is now receding faster than generally realized because of extremely weak domestic demand and predicting that more cuts in the key interest rate are likely to follow.

Inflation risks emanate primarily from persistently high inflation expectations, aggravation of external economic situation, revision of planned increases in administered prices and tariffs, fiscal policy easing, and accelerated growth in nominal wages, including those in the public sector. As inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate.

The statement envisages CPI inflation getting halved to 8% a year from now and being halved again to the target of 4% in 2017.  This will only be feasible if the ruble, which has been depressed by oil market developments and President Putin’s confrontational foreign policies, manages to stabilize.  Central bank officials are heartened by a rebound of the currency since December, but that may be only a dead cat bounce.  The next scheduled interest rate policy meeting occurs on June 15. 

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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