Russia cuts interest rates for sixth time in a row

Russia's central bank lowers borrowing costs again and signals more cuts could be in store for 2020.

    Central Bank of Russia Governor Elvira Nabiullina said that if annual inflation bottoms out near two percent in the first quarter and starts gradually returning to the four percent target by mid 2020, it 'holds open the prospect' of further rate cuts this year [Shamil Zhumatov/Reuters]
    Central Bank of Russia Governor Elvira Nabiullina said that if annual inflation bottoms out near two percent in the first quarter and starts gradually returning to the four percent target by mid 2020, it 'holds open the prospect' of further rate cuts this year [Shamil Zhumatov/Reuters]

    The Central Bank of the Russian Federation (CBR) lowered its key interest rate to six percent on Friday and said it may switch to a loose monetary policy stance later this year as inflation has slowed faster than expected.

    The central bank downplayed the recent spike in market volatility related to the coronavirus outbreak, and cut the cost of borrowing for the sixth consecutive meeting.

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    The quarter of a percentage point cut was in line with the consensus forecast in a Reuters news agency poll.

    However, some analysts had expected the central bank to leave rates unchanged given increased global market volatility spawned by the coronavirus, and the potential for the new government of Russia to increase spending that can fuel inflation. 

    Central Bank of Russia Governor Elvira Nabiullina, presenting the rate move, signalled more interest rate cuts could be in the offing this year, with annual inflation expected to bottom out near two percent in the first quarter and start gradually returning to the four percent target by midyear. 

    "If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate reduction at its upcoming meetings," the central bank said in a statement.

    Nabiullina downplayed concerns that the newly appointed government could increase state spending, saying "we believe that budget expenditure will be more evenly distributed this year".

    The rouble weakened after the move to 63.91 versus one United States dollar from the 63.82 before the cut.

    Lower borrowing costs encourage consumers to spend more and businesses to boost production, both of which fuel economic growth. But lower interest rates can also make Russian investments less attractive. 

    Uncharted territory ahead

    The cut brought the key rate to the lower boundary of the six-to-seven percent range that the central bank considers neutral from a monetary policy point of view.

    Nabiullina said the central bank may revise the neutral rate in the future, but it may take more than a year as the bank does not have sufficient data for this.

    "If our estimate of inflation and the economic situation require [it], the key rate may be set beneath the lower bound of the neutral range. This will mean [a] loose monetary policy."

    Dmitry Polevoy, chief economist at the Russian Direct Investment Fund, said Friday's communication was "a clear hint of CBR willingness to step into the uncharted sub-six percent rates territory in its search of key rate neutrality to bring inflation back to four percent under the targeted GDP [economic] growth".

    The central bank said economic growth in Russia is on track to accelerate to a range of 1.5 percent to 2 percent in 2020 and then to 3 percent in 2022, having reached 1.3 percent in 2019.

    The next rate-setting meeting is scheduled for March 20.

    SOURCE: Reuters news agency