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Russian central bank makes surprise rate cut to 15%

Russia’s central bank cut its main interest rate on Friday in a surprise move aimed at kickstarting the economy which is expected to contract sharply under the weight of Western sanctions and plunging oil prices.

The announcement to slash its key interest rate to 15 percent from 17 percent marked the first cut since December 2011.

The rate cut had come after the government urged the central bank to help boost the economy, prompting some analysts to accuse the bank of caving in to political pressure.

The ruble tumbled following the announcement, falling to 81 against the euro and 71 against the dollar. A day ago, it was trading at 77.6 to the euro and 68.73 to the dollar.

The bank argued that its action was “aimed at averting the sizeable decline in economic activity against the background of negative external factors”, apparently referring to US and EU sanctions as well as sliding crude prices.

It added that it had taken action now “due to the shift in the balance of risks of accelerated consumer price growth and cooling economy”.

Russia’s economy is expected to contract at an annual rate of 3.2 percent in the first half of 2015, the bank said.

Output growth reached 0.6 percent for 2014, official data showed Friday, nearly half of the 1.3 percent reached in 2013.

The central bank’s chief Elvira Nabiullina said although the new rate remains “quite high and helps achieve goals on inflation in the medium term”, it “does not allow excessive cooling of the economy”.

Economists had largely predicted the central bank to hold the rate in order to keep a lid on inflation, although it slowed investment in the economy and bankers and industrial leaders were calling for a cut.

-‘Growing political pressure’-

Although some economists backed the move, others accused the central bank of caving to political pressure.

“We generally welcome such a central bank decision and consider it positive for the economy and the market,” said Oleg Kuzmin of Renaissance Capital in a research note. He said the 17 percent rate was too high and caused a “domestic credit shock.”

But Capital Economics analyst Liza Ermolenko said in a research note that the decision showed “growing political pressure from the government on the central bank to provide some support to the economy.”

Ermolenko predicted that any effect on the economy would be negative: weakening the ruble and increasing capital flight due to lack of confidence in Russia’s economic policy.

First Deputy Prime Minister Igor Shuvalov on Thursday criticised the central bank as “obsessive” in stressing its “independence from the ruling authorities.”

The central bank had raised rates six times last year in a bid to counter the negative impact of sanctions and falling oil prices.

On December 15 it jacked up the key rate to 17 percent from 10.5 percent in a bid to stabilise the ruble, only to see the currency suffer its worst plunge since President Vladimir Putin came to power 15 years ago, sparking a panic in a country haunted by memories of hyperinflation.

The interest rate was then widely seen as untenably high but the central bank said on Friday that December hike had “resulted in stabilisation of inflation and depreciation expectations.”

Inflation reached 11.4 percent in 2014 and could soar to 17 percent within months, deputy economy minister Alexei Vedev said.

But the central bank said the surge in consumer prices was temporary.

In the longer term, “the inflation pressure will be contained by decrease of economic activity,” it said, forecasting inflation to fall below 10 percent in January 2016.

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