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. Last Updated: 07/27/2016

Central Bank Aims to Halve Interest Rate

Banking on a drop in inflation, Russia's Central Bank hopes to cut its lending rate almost in half by the end of the year, the bank's chairman said Tuesday.

"If the fight with inflation will be successful, then the interest rate can go down gradually to 120, 110 percent," Central Bank Chairman Viktor Gerashchenko told The Moscow Times, shortly after announcing his prediction in the lower chamber of parliament.

The lending rate to commercial banks, one factor in keeping down inflation, is now 210 percent.

In a sign that Gerashchenko's decision had been agreed with the government, acting Finance Minister Sergei Dubinin told the upper chamber of parliament that a drop in inflation to 8.5 percent in March, down from 9.9 percent in February, would enable the Central Bank to lower the interest rate to 200 percent by the end of the month, Reuters reported.

Dubinin's predecessor, Boris Fyodorov, last year forced Gerashchenko to raise the interest rate to make it more expensive for commercial banks to take government loans. Inflation skyrocketed in 1992 partly because commercial banks and industries took out loans at rates lower than inflation.

But Gerashchenko said that there was no risk of another jump in inflation because Central Bank rate cuts would only follow reductions in the rate at which commercial banks lend money to each other.

"The reduction of our rate will depend on the rate on the interbank market, because under our agreement with the government, approved by the International Monetary Fund, our rate should not differ by more than 5 percent from the interbank market rate," he said.

The interbank rate has fallen to about 220 percent, down from 240 to 250 percent in January.

The Central Bank calculates its annual interest rate by multiplying its monthly interest rate by twelve.

That means its monthly interest rate is now 17.5 percent, well above inflation. If the Central Bank rate goes down to 120 percent, or 10 percent monthly, the rate will still exceed projected monthly inflation of 7 to 9 percent.

Charles Blitzer, chief economist for the World Bank in Moscow, said in a telephone interview that the lowering of interest rates would not boost inflation as long as it was properly timed.

But if the bank lowered its lending rate to push down commercial interest rates, it could boost demand for credits and thus push up inflation, he said.

Blitzer added that the Central Bank can only lower interest rates if inflation indeed stabilizes between 7 and 9 percent by the end of the year, as predicted by the government in its draft budget for 1994.

The parliamentary budget and economics committees, in a hearing Tuesday, harshly rejected the budget as unrealistic, while Communist deputies urged additional spending that is likely to prevent a reduction of inflation.

Yevgeny Rogachev, head of exchange operations at Menatep Bank, said that lower interest rates would help industries pay debts and salaries, often months overdue, but would also push commercial banks out of the credit market because the lower rates would make loans less profitable.

In the short run, he added, demand for loans would be extremely low because industries would be hesitant to borrow now if they knew they could borrow at lower rates later.

Rogachev said commercial banks might use the Central Bank credits to buy dollars, a safer and more profitable investment. Last year, banks used cheap credits to buy dollars, driving down the exchange rate of the ruble.

Igor Doronin, currency expert at the Moscow Interbank Currency Exchange, said that the Central Bank would face a rise in the ruble against the dollar if it kept up its interest rate, as cash-strapped industries started selling their hard currency reserves to obtain rubles.

First Deputy Finance Minister Vladimir Petrov told the State Duma that the ruble exchange rate would fall to 3,000 rubles per dollar by the summer and to 4,300 or 4,500 by the end of this year. Earlier government predictions had pegged the ruble at between 2,000 and 2,500 by the end of this year.