Interest rate curveball
January 30, 2015
The bank explained its surprise decision by saying that the risk of inflation had gone down while the risk of economic slowdown had risen.
On December 16, the central bank drastically raised its interest rate from 10.5 to 17 percent to stem a ruble devaluation. But the move was all in vain as the Russian currency collapsed to new depths and lost 20 percent of its value in a single day.
Now the new interest rate cut has put fresh pressure on the ruble, with the Russian currency trading at over 70 to the dollar and 81 to the euro in the afternoon.
New strategy
But the Russian bank stuck to its guns and said that December's interest hike had stabilized inflationary and devaluation expectations. "The surge in inflation was caused by the rouble's weakening and will be of limited duration," it said.
The move implies a shift in the Bank of Russia's priorities. Reining in inflation and supporting the ruble has given way to supporting economic activity, which the Russian bank expects to fall sharply in the coming months.
Russia's inflation rate soared to 11.4 percent last year, the highest level since 2008. Now analysts have started warning that prices will continue to rise in coming months as the weak ruble makes imports more expensive.
Russia's economy grew by only 0.6 percent last year and economists predict a recession of up to 4 percent for this year.
bk/hg (Reuters, dpa)