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. Last Updated: 07/27/2016

Russia Cuts Rates on Eve of IMF Visit




Russia's Central Bank lowered interest rates Monday for the first time since the Asian flu hit markets last October.


Russia cut its refinancing rate, the main indicator of Central Bank monetary policy and an effective cap to treasury-bill yields, to 39 percent from 42 percent beginning Tuesday. It also cut the Lombard rate, which governs one of its main funding facilities, to 39 percent from 42 percent.


The move comes on the eve of a visit from International Monetary Fund Managing Director Michel Camdessus and ahead of Wednesday's final consideration of the 1998 budget by the State Duma.


Fixed-income analysts hailed the lowering of the rates but said Russian T-bill yields, which have fallen about 13 percentage points this month, were still being held up by fears over currency stability.


Robert Devane, head of fixed income at Troika Dialog investment bank in Moscow, said the central bank was trying to re-establish the refinancing rate as a rate cap as well as indicate the success of its own policy.


"It is a cautious step in the right direction," he said, predicting yields on longer bills, which continue to make investors most nervous, could fall to the low 30s from just under 35 percent on the rate move.


The bank raised rates to 42 percent Feb. 2, when it was faced with massive selling prompted by fears it would devalue the ruble, a rumor central bankers squashed, saying they would protect the ruble by raising rates.


Since then a wave of good news has flooded Russia, including vocal support from Camdessus, expected in Moscow on Tuesday to decide the fate of the next tranche of its three-year $9.2 billion loan, a Finance Ministry spokesman said.


Oleg Zhukov, press secretary for Finance Minister Mikhail Zadornov, said the new International Monetary Fund offer would be in addition to a tranche based on Russia's 1997 fourth quarter economic performance, though he was unable to say if the funds were part of credits already earmarked for 1998.


"Naturally, we expect that a new tranche will be offered, but we do not know if we will accept it," he said. "On one hand, it is cheap money. But we might turn it down. The situation is such that we may not need it," he said, quoting Zadornov.


Camdessus is scheduled to meet with Zadornov, Prime Minister Viktor Chernomyrdin, Central Bank chairman Sergei Dubinin and the speaker of the Duma, Gennady Seleznyov, during his three-day visit.


While the lowering of the refinancing and Lombard rates comes as good news for Russia's economy, one official's forecast Monday that inflation, predicted in the budget for 5.7 percent, may reach 10 percent, making it difficult for the government to meet its financial targets.


Vladimir Petrov, Russia's first deputy finance minister, said the government might have to include the more realistic inflation forecast in this year's budget, Interfax reported.


Petrov also said it would be difficult for the government to raise the additional 27 billion rubles ($4.5 billion) in revenues that was added to the government's original budget draft after talks with lawmakers.


Despite growing concerns that the draft is unrealistic, the parliament's lower house, the State Duma, is expected to finally approve the budget this week following a series of debates.


Alexander Zhukov, acting chairman of the Duma's Budget Committee, said there were no outstanding issues left to prevent the final passage of the budget. The fourth and final reading is scheduled for Wednesday, but could last until Friday.


He acknowledged that the current draft "will be very difficult to fulfill, both on revenues and spending," Itar-Tass reported. (Reuters, AP)