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. Last Updated: 07/27/2016

Central Bank Cuts Key Rate to 60%

Russia's Central Bank cut interest rates Friday in what economists said was a move to offset the painful effects of a government austerity package on business and the oil sector.

The bank lowered its leading refinancing rate to 60 percent from 80 percent effective Friday.

Bank officials declined to comment on the reduction, which was undertaken despite a steady decline of the ruble this week.

But economists and market dealers said the decision would ease the pressure of punitively high rates on economic growth and industry.

The government has already revised its growth forecast for 1998 sharply downward as a result of Russia's worst economic crisis in five years, predicting that gross domestic product would contract by 0.5 percent this year and not grow by 2 percent as previously predicted.

"The country can't exist on high interest rates," said Al Breach, an economist with the Russia-European Center for Economic Policy.

"They have done the things now that should have made it possible to defend the ruble, and they have got the IMF money," Breach said referring to the $17.2 billion in fresh loans rubber-stamped by the International Monetary Fund on Monday, part of an overall $22.6 billion international package.

"They have now to bring interest rates down to a level where the economy can work," he added. "They have moved into a situation where people aren't expecting a run on the currency, so they can allow the ruble just to depreciate a little."

The ruble has done just that this week, sliding from 6.20 against the dollar Monday to change hands at 6.27 on Friday.

Traders have explained the slide on renewed pessimism concerning Russia's financial markets, which have collapsed this spring amid chronic investor concern over a hole in the government's finances.

The Central Bank has been forced to increase interest rates to punitively high levels to defend the ruble. Rates peaked at 150 percent in May, and have persisted above 50 percent for more than two months now.

Analysts believe the IMF money has bought the government -- and the ruble -- some breathing space, but expressed concern that Friday's rate cut may have come too soon.

"It would have been better to wait a little bit longer," said John Orford, an emerging markets specialist at Robert Fleming Securities in London.

"The markets haven't really stabilized yet," he said. "There is heightened concern in the financial community that the measures agreed with the IMF might have some difficulty passing in the [State] Duma," or lower house of parliament.

Traders said markets were interpreting the bank's move as a coordinated strategy to ease the ruble's value gently downward and help exporters, who are key contributors to the public coffers.

"A slide devaluation of 10 percent will help oil companies, and so help the budget, without overly hurting the banking sector that would be killed off by a forced sharp devaluation," said Alex Gorelik, a trader with the Rinaco Plus brokerage.

"Other than that I don't see why they need to lower rates," he added. "Lower rates sends the signal that we're out of the woods, but that's clearly not the case."