Russian central bank cuts main interest rate as recession fears rise

In a surprise move, Russia's central bank cut its main interest rate yesterday as fears of recession mounted in the country following the fall in global oil prices and western sanctions over the Ukraine crisis, Reuters reported.

The central bank slashed its one-week minimum auction repo rate by two points to 15 per cent, a little over a month after pushing it up by 6.5 points to 17 per cent following a run on the rouble.

It had been widely expected that the bank would retain the rate. Following the decision the rouble extended losses to trade as much as 4 per cent lower on the day against the dollar, even as it later clawed back some of the losses.

The move implied a shift in the priorities of the bank away from clamping down on increasing inflation and supporting the ruble, toward trying to support economic activity, which the bank expected to fall sharply over the coming months.

According to Elvira Nabiullina, the banks' governor, the decision yesterday to lower key interest rate by 2 percentage points was intended to balance the goal of curbing inflation and restoring economic growth.

The bank's press service quoted her as saying in an e-mailed statement that the rate remained high enough to allow the Bank of Russia to reach its inflation target in the medium term.

Meanwhile, AFP reported that the central bank's decision was aimed at kickstarting the economy which was expected to contract sharply under the weight of western sanctions and falling oil prices.

The announcement marked the first cut since December 2011.

The rate cut had came following the government urging the central bank to help boost the economy, which prompted some analysts to accuse the bank of caving to political pressure.

The ruble slipped following the announcement, falling to 81 against the euro and 71 against the dollar, while a day ago, it was trading at 77.6 to the euro and 68.73 to the dollar.

According to the bank, its action was "aimed at averting the sizeable decline in economic activity against the background of negative external factors", apparently referring to US and EU sanctions as also sliding crude prices.

It further added that it had taken action now "due to the shift in the balance of risks of accelerated consumer price growth and cooling economy".