Russia cuts rates to rein in rouble

Moscow: Russia's central bank Tuesday unveiled a widely-expected interest rate cut, its ninth since April, in a bid to slow down the appreciation of the rouble and support the economy's still fragile recovery from recession.

The benchmark refinancing rate was reduced by 50 basis points effective from today, to a new historic low of 9.00 per cent. Other rates were also reduced by the same amount, taking the minimum rate on one-day repo auctions — a key central bank liquidity tool — to 6.25 per cent.

"Lending activity of Russian banks is still at a low level, and internal demand remains insufficient to ensure stable growth of manufacturing, which led to the need to cut rates,' the central bank said in a statement.

"The decision (to cut rates) was taken with the aim of further increasing the accessibility of credit resources... and stimulating end demand."

It added that favourable trends in inflation have facilitated the rate cut. Russian Prime Minister Vladimir Putin at the weekend forecast that full-year inflation will come in at 9.6 per cent, down from 13.3 per cent in 2008.

Russia is starting to recover from its first recession in a decade, into which it slipped in the second half of 2008 at a time of falling oil and commodity prices, investor flight from emerging markets and the global credit crunch.

But the brightening economic outlook, together with the rally in oil prices to one-year highs and the still comparatively high levels of Russian interest rates, have sparked a rally in the rouble.

Some are worried the strength of the currency could unseat the recovery and jeopardise efforts to boost domestic industry.

The central bank said the reduction in domestic and external rate differentials as a result of the rate cut "will contribute to restraining the appreciation of the rouble".

The rouble traded at 35.25 (Dh4.49) versus a euro-dollar basket, little changed on the day but off a peak of 35.03 set a week ago.