CBR surprises with 2 p.p. cut in key rate

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/06

The key rate was lowered to 15 % starting from Monday (Feb 2). The Central Bank of Russia said the rate cut was possible because its 6.5-percentage-point increase of the key rate in December to 17 % has already calmed to some extent inflation expectations and devaluation expectations. The CBR views that the pick-up in inflation at the end of last year is temporary and largely a reflection of the ruble’s decline.

The CBR noted that inflation may accelerate further in the months ahead until the economy has adjusted to the new external environment. After that weak demand should slacken the inflation rate. Data for January showed an on-year rise in consumer prices of as much as 15 %, up from 11.4 % in December. The CBR expects inflation to be back below 10 % in January 2016.

The CBR also motivated the rate cut by the weak economic development which needs support. It noted a lower key rate should improve corporate borrowing, which is one of the aims in the government’s new support programme.

The rate cut caught most observers by surprise. Some see lower rates as a welcome form of stimulus although doubting whether a two-percentage-point reduction can have much impact. Others have viewed the preceding hike of the rate as a sign of primarily shifting back towards the old monetary policy focus of stabilising the ruble’s exchange rate.

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