Russia Cuts Interest Rates for Fifth Time This Year

By Andrey Ostroukh 

        MOSCOW--The Bank of Russia cut interest rates on Friday for the fifth time so far this year, citing economic risks, but declined to commit on whether there would be further monetary easing.
        The central bank cut the key rate by half a percentage point to 11%, in line with the market consensus, taking its total cuts so far this year to six percentage points. Still, the key rate remains above 10.5%, the level it was at in early December, before an emergency increase to 17% that helped to stabilize the plummeting ruble.
        The cut is smaller than a month ago, when the central bank slashed rates by one percentage point. But the continuation of a policy of monetary easing indicates that the central bank is trying to revive the battered economy without letting the rate of inflation rise.
        Even though a pause in the monetary easing cycle is possible, more rate cuts are likely later this year, with inflation set to slow anyway thanks to the so-called 'base effect.'
        "The CBR's decision was primarily driven by the need to alleviate the policy stance considering that growth risks increased more than inflation risks since the previous meeting in June," said Oleg Kouzmin, chief economist at Renaissance Capital in Moscow.
        Analysts predict further cuts later this year, with the key rate likely to fall to around 10% or even lower by the year-end. But at the next rate-setting meeting on Sept. 11, the central bank could put rates on hold as there are risks that the ruble may weaken substantially should the U.S. Federal Reserve eventually tighten its monetary policy.
        VTB Capital said in a research note that the Bank of Russia is likely to prefer switching to a 'wait-and-see' mode to assess the balance of risks from the Fed's possible rate hike, which is expected at its meeting on Sept. 16-17.
        "Tighter fiscal and looser monetary policy with a softening (but not collapsing) ruble exchange rate would amount to the optimal policy mix for getting Russia out of its present economic hole," said Christopher Granville, head of emerging market research firm Trusted Sources.
        The Bank of Russia painted a dire economic picture, saying that contraction in gross domestic product intensified in the second quarter compared with the first three months of 2015, while oil prices, vital to the economy of this hydrocarbon-producing country, have little chance to recover.
        "The economic situation in Russia will further depend on the dynamics of world energy prices and the economy's ability to adapt to external shocks. At the same time, the scenario with oil prices remaining below $60 per barrel for a long time is more probable than it was in June," the central bank said in a statement.
        Battered by another slide in oil prices, the ruble weakened following the rate move to 61.15 against the dollar, a level last seen on March 18. It stood at 60.3 before the monetary decision.
        Given that consumer demand, the economy's key driver, is falling faster than expected, the central bank warned it may worsen its full-year economic forecast. Data showed earlier this month that retail sales, the key gauge of the consumer demand, fell by 9.4% in the second quarter compared with the same period a year ago.
        Hit by oil prices that halved from a year ago together with Western sanctions, Russia's economy has slid into recession for the first time since 2009 and, according to the government, will shrink by up to 3% this year.
        But unlike in June, this time the central bank's statement contained no commitment to cut interest rates further despite strong economic headwinds. Analysts had warned that the renewed ruble weakness in recent weeks, mostly driven by a slump in oil prices, is scuttling hopes for further sweeping cuts to the central bank's lending rates to revive the country's economy this year.
        "The Bank of Russia will further decide on its key rate depending on the balance of inflation risks and risks of economy cooling," the regulator said.
        The central bank is trying to tame stubbornly high inflation without sending the economy into a deeper recession. Earlier this week, the central bank suspended daily purchases of dollars and euros for its reserves, as the ruble dropped to its weakest levels since March, posing new inflationary risks. Annual inflation stood at 15.8% in late July, well above the central bank target of 4%
        The suspension of interventions of up to $200 million a day will lift additional pressure on the ruble in the second half of this year, the central bank said in an emailed comment on Friday.
        Write to Andrey Ostroukh at andrey.ostroukh@wsj.com
        (END) Dow Jones Newswires

        July 31, 2015 12:34 ET (16:34 GMT)

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