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. Last Updated: 07/27/2016

Central Bank Cuts Interest Rates

Russia's Central Bank cut interest rates Friday, telling the market that the economy, hard hit by the Asian turmoil, was on the road to recovery.

"Nowadays the market should react to our policy," the Central Bank's first deputy chairman, Sergei Alexashenko, said in a television interview.

The bank's board of directors decided Friday to cut its benchmark refinancing rate and its Lombard rates to 36 percent from 39 percent, effective Monday.

The Central Bank was forced to raise interest rates last month to shore up investor confidence and only started cutting rates again last week. Rates were raised sharply in response to widespread concern that the ruble would be devalued, although the Bank said there was little danger of a devaluation since it would raise interest rates as necessary to defend the currency.

Alexashenko said the decision to cut rates would encourage a trend of decreasing treasury bill yields. He said the Central Bank, which had to defend an attack on the ruble last month, was now buying dollars, strengthening its reserves.

The Central Bank lends overnight money at the refinancing rate, but its main function is to indicate bank monetary policy and act as an effective cap on T-bill yields.

The Lombard rate is seen as a cap on money market yields.

Alexashenko said T-bill rates, which peaked at 45 percent last month, had practically fallen below 30 percent. Foreigners are returning to the market and increased T-bill holdings by 10 percent in the first three weeks of February, he said.

"If we say that suddenly Russia will overcome all the crisis events within one month, I think interest rates will be somewhere between 23 and 25 percent," he said.

Markets responded positively to the rate cut, with T-bill yields falling over half a percentage point on issues maturing in nine and 10 months.

Talks with ratings agencies, which are in Moscow to review Russia's credit-worthiness, had gone positively, he said, adding that he didn't expect ratings would be downgraded.

"There is a lot of new information that was not known by the agencies and by the market," he said. "We assume rating agencies may delay making any decision about Russia's rating, it will remain stable."

Moody's and Fitch IBCA are both winding up reviews after putting Russia on ratings watch for a possible downgrade.

A ratings cut would hurt Russia's pride as well as its credit-worthiness, pushing up the government's cost of borrowing on international financial markets.