Russian Central Bank cuts key rate to 11%

Russian Central Bank cuts key rate to 11%

The Central Bank of Russia (CBR) has cut the key interest rate from 11.5% to 11%. According to the press service of the Central Bank, the Board of Directors of the Central Bank has lowered the rate, since the balance of risks was shifting towards a considerable cooling of the economy, despite a slight increase in inflation risks. 

The regulator expects that annual inflation will fall below 7% in July 2016 and reach the 4% target in 2017.

According to the Central Bank, major macroeconomic indicators demonstrate further economic cooling. "GDP decrease in 2015 Q2 compared with the similar quarter last year is more significant than that in Q1 2015," the Central Bank of Russia (CBR) said, adding that the consumer price rises will continue to slow amid slack domestic demand.

The Council of Directors of the Bank of Russia will hold their next session on February 11.

The professor of the RANEPA Chair of Finances, Money Circulation and Credit, Yuri Yudenkov, told Vestnik Kavkaza that the Central Bank of the Russian Federation outlined its position with the decline in the key rate up to 11%. "It is not about reducing the rate, but about the statement that it welcomes this procedure and it will continue to respond to the needs of industry and the economy which need to be credited," he explained.

According to Yudenkov, a greater reduction in the key rate is impossible at the moment.

The economist expects that the rate will fall to no more than 10% by the end of the year. "The fact that a number of industrial projects weren't running, there are a lot of imports, so it cannot be lowered to 7%. A growth in rates is not expected, since the mechanisms of purchasing currency have changed – now you need various schemes, which the Central Bank controls, to buy volumes of currency. A situation similar to the end of last year will not happen again," Yuri Yudenkov said.

A leading researcher at the Institute of Applied Economic Research of the Russian Presidential Academy of National Economics and Public Administration, Alexander Abramov, agreed that 11% is the limit for the key rate at the moment. "The Central Bank had no opportunity for further lowering, because inflation is high and the rate cannot be lower than the prevailing rate of inflation. The decrease of 0.5% is the optimum value," he said.

He predicted that before the end of the year the rate may even be reduced by between 2% and 2.5%. "If the total annual inflation will be close to 11.2%, the rate may reach 9-9.5%. So far we have not seen such a rapid process of inflation, and I think that if everything goes as it is now, we shouldn't expect any major changes until the end of the year," Abramov said.

"There are many predictions, but the meaning is that if the Ministry of Economic Development will hold the rate at about 60 rubles per dollar by the end of the year it will be possible to talk about a decrease in the rate. If the rate will go up to 80 rubles per dollar, which is unlikely, we will have to raise the rate. I think that 60 is quite a realistic number for the end of the year," the economist concluded.

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