Russia cuts interest rates in surprise move

Jan 30, 2015, 2:46 PM EST
Russia's central bank in Moscow, on Friday, Jan. 30, 2015. Bloomberg/Bloomberg via Getty Images
Bloomberg/Bloomberg via Getty Images

Russia’s central bank decreased interest rates from 17% to 15% in a surprise move on Friday. The decrease shows that stimulating economic growth in Russia’s ailing economy is now a higher priority than combating inflation. Bloomberg reports that central bank Governor Elvira Nabiullina has come under pressure from officials and business leaders, including billionaire Oleg Deripaska, who’ve warned that the economy will grind to a halt and undermine banks unless rates come down. The central bank had raised the benchmark rate six times last year, including a 6.5-point increase in December that was the biggest since 1998, to defend the ruble and tame inflation stoked by international sanctions related to the Ukraine conflict.

The central bank said it expected gross domestic product to fall by 3.2 percent in annual terms during the first half of 2015, following growth of 0.6 percent in 2014, notes Reuters. "This tells us they are looking beyond rising inflation in the coming months to try to stimulate economic growth," said William Jackson, emerging markets economist at Capital Economics in London. "But I don't think the rate cut will have much impact (on growth). If you look at the stress on the banking sector, capital flight, the real income squeeze and collapse in oil prices, then a recession is inevitable."

Analysts had nevertheless expected the bank to hold rates this month, as the bank had previously said it would cut rates when inflation is on a sustained downward trend. Inflation has instead been shooting up as a result of the slide in the rouble. The bank said that it saw conditions for lower inflation in the medium term, but effectively acknowledged that inflation would stay in double digits throughout this year.

The interest rate is still extremely high, Liza Ermolenko, an emerging markets economist at Capital Economics, told the BBC, and the economy is vulnerable to low oil prices and concerns about further sanctions. Nevertheless, the high interest rate may be cushioning the rouble against other currencies. "The fall in the rouble has been relatively limited - the fall has not been as sharp as you'd expect, in relation to the context of recent movements," she said.