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. Last Updated: 07/27/2016

Central Bank Halves Key Deposit Rates

The Central Bank slashed its key deposit rates Saturday in a move analysts said was aimed at improving money market liquidity, halting the ruble's appreciation and reducing the cost of domestic treasuries.

The abrupt cuts were also seen as sending a signal that the new Central Bank management was making good on its promise to play a more active role on the financial markets.

The bank reduced its overnight rate to 2 percent from the previous 4 percent, slashed its spot-next rate to 0.8 percent from a previous 5 percent and cut the one-week rate to 5.5 percent from 11 percent.

The Central Bank wants its instruments and rates to become benchmarks for commercial banks, Oleg Vyugin, the Central Bank's first deputy chairman, said in an interview Friday.

"A more active deposit rate policy is a sort of first step," said Alexei Zabotkine, chief economist with the United Financial Group investment bank.

Some analysts said the move was also designed to speed up the ruble's nominal depreciation and stall real-term growth.

"From the point of view of money policy, the move could mean that the Central Bank now wants a faster ruble depreciation," said Natalya Orlova, chief economist with Alfa Bank. "In principle, any rate cut on our markets prompts a inflow of rubles to the currency market."

The rate cut comes on the heels of the Central Bank's promise to cap ruble appreciation against the dollar at 5 percent this year after more than 9 percent growth in 2001.

The ruble has been depreciating in nominal terms, but with inflation running at double digits it has effectively firmed. Its real-term appreciation has sparked discontent among local exporters, who say it erodes their competitiveness.

A hefty inflow of petrodollars from exporters, obliged to sell 50 percent of their hard currency earnings to the Central Bank, helped keep the ruble steady in April.

"It seems that the Central Bank wants to force banks to park rubles in longer-term deposits to make it easier for it to control money flows," said Alexander Karpov, chief economist at Zenit Bank.

The Central Bank, which up until now tended to regulate money supply through interventions rather than rates, does not publish information about its ruble deposits, but analysts estimate the amount to be some 20 billion to 30 billion rubles ($640 million to $960 million).

Analysts also said the move could be aimed at reducing the cost of domestic borrowing.

"The ultimate aim of the Central Bank is to prevent a sharp rate rise on the money market when the government is borrowing actively," UFG's Zabotkine said.

In 2002, the Finance Ministry plans to issue 97.5 billion rubles' worth of ruble-denominated bonds and 48 billion rubles' worth of treasury bills.

Saturday's cuts could also stimulate the country's largest bank, Sberbank, which holds more than 70 percent of the retail deposit market, to invest more money in government securities rather than keep its rubles with the Central Bank.

"As it is Sberbank's funds that form the bulk of ruble deposits in the Central Bank ... the cut should prod it toward a more active policy with government paper," Alfa Bank's Orlova said. "The yields on that market have grown somewhat, so it may be a signal that the Central Bank does not like Sberbank's stance."

Forex dealers took little notice of the rate cut as most closed their books ahead of the May Day holiday, which begins May 1.

The ruble ended a quiet session virtually unchanged at 31.1850/31.1950 against the dollar.