Central Bank Makes Surprise Cut in Key Rates

The Central Bank announced a surprise 50 basis point cut of its key rates Tuesday, saying that while inflation was under control and the risk of ruble devaluation had faded, stalling credit growth and falling industrial output were placing economic recovery in jeopardy.

The bank cut its refinancing rate to 10 percent from 10.5 percent and lowered the repurchase rate to 9 percent from 9.5 percent, it said in a statement posted on its web site. The rate cut is the bank’s seventh since April 24.

Industrial output, which slumped in August after two months of improvement, was a key reason for the rate cut, the statement said.

The economy hit a low point in May, and in the ensuing months has been seesawing between growth and contraction, Central Bank First Deputy Chairman Alexei Ulyukayev said at a VTB investment conference Tuesday.

“This applies to the growth of domestic product, industrial production, the expectations of plant managers and banks’ credit portfolios,” he said.

The Central Bank wants to continue stabilizing the real economy with “a stronger action … than was taken the last two times,” Ulyukayev said.

Another reason for the rate cut was a lowered risk of inflation, he said.

“We see the risk of inflation as low, compared to the chances of economic growth,” he said.

He said inflation would likely be under 11 percent at the start of October, and would likely remain at those levels by the end of the year.

The Central Bank did not exclude the possibility of further rate cuts. “Interest rates on loans to the real sector remain relatively high,” the bank statement said, adding that further cuts would be based “on the necessity for widening credit and stimulating economic growth, taking inflationary tendencies into account.”

While the macroeconomic environment is favorable for lowering interest rates, the bank cannot “make any commitments, not on the timing, nor on the size” of the next rate cut, Ulyukayev said.

The banker also struck an optimistic note, saying a banking crisis due to bad debt was unlikely because bad debts were growing at a slower rate than expected and did not present a threat to the banking industry.

His optimistic comments also extended to the ruble, which has rallied to its highest level against the dollar in recent months.

As the Central Bank focuses on limiting volatility, the ruble is in a “quasi free-float,” Ulyukayev said. The Central Bank has spent about $10 billion intervening in currency markets over the past three months, he said.

The bank aims to shift its focus to targeting inflation and expects the ruble to be completely free-floating by 2012, he said.

The Central Bank has bought $1 billion at a price of 36.4 to the euro-dollar basket, Ulyukayev said.

The ruble barely reacted to the rate cut, trading at 30.16 to the dollar and 36.36 to the euro-dollar currency basket.

Another rate cut Tuesday came from the Agency for Mortgage Lending, which announced that its base rate for mortgages would be reduced by 50 basis points, from 10.55 percent to 10.05 percent. The agency last cut rates on Sept. 15, matching a 25 basis point cut in the refinancing rate by the Central Bank.

Analysts said that the Central Bank’s rate cut could have more to do with influencing foreign opinion regarding Russia’s economy than stimulating interbank lending.

“News coming out of Russia will have a major bearing on access to foreign funding,” said Citibank chief economist Elina Ribakova. “The Central Bank is under pressure to demonstrate that they are supporting the economy. They did not do this from a position of strength.”

The rate cut will not have much of an effect on bank-to-bank lending, which will only improve when banks write off more of their bad debts, Ribakova said.

Ulyukayev said the level of bad debt among banks was at 10 percent to 12 percent, and would probably not go higher by the end of the year.

“Lending between banks is stagnant now, but that’s because lending is still risky,” said Alfa Bank chief economist Natalya Orlova.

The Central Bank’s rate cut won’t do anything to alleviate that risk, she said.

But the rate cut was advantageous for the Central Bank, “given the fact that they have been intervening in currency markets anyway,” Ribakova said.