The Russian central bank cut its key interest rate by 0.5 percentage points to 11 percent on Friday, bowing to the pressure of businesses to make lending more accessible. The bank's decision comes as the ruble has dropped to a four-month low. Market watchers were saying that Russian monetary officials are having to choose between cutting the interest rate, thus helping Russian companies, and keeping it on hold to cushion the ruble's fall and stem inflation. Higher interest rates tend to bolster a currency and push inflation down.
The central bank explained in a statement that "a balance of risks now tilts to a significant slowdown of the economy despite a certain growth of inflation risks." It said it expected the rate cut to not spur the inflation further because consumer spending has been declining.
Russian businesses complained of a lending squeeze, brought by sanctions against Russian banks as well as prohibitively high interest rates inside the country. Moscow-based investment bank Sberbank CIB said in a note to investors that Friday's 0.5 percentage cut is not as big as anticipated, indicating that the central bank wants to "play it safe" and avoid pushing the ruble down too much.
The rate cut, however, did speed up the decline of the national currency. The ruble was down 1.8 percent at 60.8 rubles to the dollar after the announcement, having earlier traded 1 percent lower.
The next central bank decision on interest rates is on Sept. 11 and the economic development ministry says they are expecting a further cut if inflation stays where it is. The national currency has lost about 15 percent since May as the government began buying foreign currency to replenish its international reserves. The central bank raised the rate to 17 percent overnight in December last year to limit a plunge in the value of the ruble, but has been trimming the rate back down this year as the ruble recovered somewhat.
The Russian economy has entered recession for only the second time in Putin's 15 years in power as it feels the pinch of lower oil prices, its biggest source of revenue, as well as Western sanctions. The central bank also warned Friday that a drop in the economy, currently forecast at 4 percent, could be sharper because of weak consumer confidence.
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