The Central Bank of Russia slashed its crucial interest rate to 11.5 percent on Monday in order to stimulate economic growth. The move is not a repeat of previous drastic basis cuts, but some experts were on the mark when they believed the bank would reduce the rate by a full percentage. Russia cut rates in May from 14 to 12.5 percent, and economists expect the bank to continue cuts but on a less severe basis.
The cut was made as projections for the Russian economy remain grim, and weak inflation pressure allowed the bank to cut rates. Russia is dealing with a host of issues, including lower oil prices and a weaker ruble. CBR Governor Elvira Nabiullina faced growing pressure to lower the rate, especially as Russian GDP contracted by 4.2 percent in April. Further, the economy declined by 1.9 percent in the first quarter, and more stagnation is expected for the second and third quarters. The low-growth atmosphere gave the bank enough room to cut rates to foster lending and consumer spending. Nabiullina may continue to take a more reserved policy, and the central bank is taking a more conservative approach when rebuilding currency reserves after the ruble plummeted in value last year. The bank purchased $3.6 billion in foreign reserves over the past month, signaling that the bank is keeping a tight lid on its currency.
Before the cut announcement, analysts believed officials would cut rates as much as 100 basis points from 12.5 percent, while analysts from Morgan Stanley believed the bank would make a deeper cut of 150 basis points. Credit Suisse expected the bank would only cut rates by 50 basis points. Russia raised rates at 17 percent in 2014 to curb the tides a weak ruble and rampant inflation.
All eyes are on Russia to see if the economy will be able to withstand the ongoing sanctions over the Ukrainian conflict, and the GDP contraction from April indicates that Russia may not be fully out of the storm yet. The Russians will have to prove that their economy is a viable alternative for investment, as many investors dumped the ruble because of western sanctions. However, the ruble has been the best performing currency against the dollar in the past year, allowing the bank to make less cuts going forward, and analysts believe heavy cuts are no long necessary, as the ruble has gained in value. However, inflation remains an issue, standing at 15.8 percent.