Business

Russia cuts interest rates from 17% to 15%

Roubles Image copyright Reuters

Russia has cut its main interest rate from 17% to 15% because inflation "is stabilising".

The rouble fell by more than 2% against the dollar following the central bank announcement.

Russia's economy has been suffering for a range of reasons, including economic sanctions by the West over its involvement in the crisis in Ukraine.

This week the government said it would put measures in place to try to stave off an economic crisis.

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The measures included investing at least 2.34 trillion roubles ($35bn, £23bn) in the economy, following a collapse in oil prices and the rouble.

Rouble trouble

The Bank of Russia said the interest rate could be cut "due to the shift in the balance of risks of accelerated consumer price growth and cooling economy."

The rouble fell around 2.4% against the dollar on the news, leaving the dollar worth more than 70 roubles.

Against the pound, the rouble was trading around 3% lower.


Analysis

Andrew Walker, BBC World Service economics correspondent

The Bank of Russia faces an unenviable dilemma.

High inflation - 11.4% last year - calls for higher interest rates and that was the Bank's focus last month when it did just that.

This time it has shifted its attention to what it calls, with more than a hint of euphemism, a cooling economy.

In fact the International Monetary Fund forecasts the economy will contract this year, by 3% and in 2016, by 1%.

The Bank explains the change in policy by saying expectations about the currency and inflation have stabilised.

The point is that if people involved in setting prices and pay think the situation has stabilised it's more likely that it will.

Still inflation remains high, and so does the central bank's key interest rate.


Liza Ermolenko, an emerging markets economist at Capital Economics, told the BBC that one of the main reasons for the rate cut was the Russian government's concerns about growth.

However, given the problems in the economy, she said: "It's unlikely that this move will have a significant impact this year. Russia will still experience a very deep recession."

"Modest cuts are unlikely to change the bigger picture," she added.

The interest rate is still extremely high, she said, and the economy is vulnerable to low oil prices and concerns about further sanctions.

Nevertheless, the high interest rate may be cushioning the rouble against other currencies.

"The fall in the rouble has been relatively limited - the fall has not been as sharp as you'd expect, in relation to the context of recent movements," she said.

In December, the rouble suffered steep falls after falling oil prices and sanctions.

Russia drastically raised its interest rate in December - from 10.5% to 17% - to try to stem the rouble decline.

Oil woes

The halving over the past year of energy prices has hit Russia's income.

The government relies on oil and gas for half its tax revenue and needs the price of a barrel to be at $100 to balance its books, rather than the $50 it is currently.

The value of the rouble has plummeted pretty much in tandem, with the weaker currency making imports more expensive.

That has pushed up Russia's inflation rate to 9%, despite the lower price of energy, which would usually bring down the overall inflation rate, as can indeed by seen in Friday's eurozone inflation figures.

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