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Russia central bank makes confidence-boosting rate cut

Russia's central bank on Thursday announced a half point cut in its main interest rate in a gesture of confidence following recent stabilization of the currency and a drop in inflation.

business Updated: Apr 23, 2009 18:10 IST

Russia's central bank on Thursday announced a half point cut in its main interest rate in a gesture of confidence following recent stabilization of the currency and a drop in inflation.

The new refinancing rate will be set at 12.5 percent instead of 13 percent starting from Friday, the bank said, the first cut since June 2007. "From April 24 the refinancing rate of the Bank of Russia is set at 12.5 percent annually," a bank statement said, adding that the its overnight credit rate would also be 12.5 percent annually.

The move comes after Prime Minister Vladimir Putin told central bank chief Sergei Ignatyev on Wednesday that lower inflation ought to permit an interest rate cut. Monthly inflation declined from 2.4 percent in January to 1.3 percent in March and is set to fall further this month, Putin said.

The bank's deputy head, Alexei Ulyukayev, linked the cut to a stabilization of the Russian ruble, which lost a third of its value in the second half of last year, and to the fact inflationary pressures are easing. "If we see that inflationary expectations are tending to reduce we will be ready to take additional steps to reduce the refinancing rate," Ulyukayev said, quoted by the Interfax news agency.

The bank had steadily raised rates since February last year both in an effort to curb inflation and to discourage capital flight. The latest half-point cut was largely a token gesture designed to show confidence in the ruble and boost the country's ailing banking sector, said Chris Weafer, an analyst at UralSib bank in Moscow.

He said the authorities remained very cautious, particularly about a further drop in the price of oil an important economic prop and that the emphasis for policy makers remained firmly on stability rather than growth. "It's much more a token move by the government to show they feel more confident about the currency," Weafer told AFP.

"The next priority is to bring stability to the banking system and try to encourage some form of lending.... The banks are very reluctant to resume lending operations. They're concerned about the problem of non-performing loans and bad debts and how much capital they may need," he said.

In recent weeks, there have been rising fears about the health of Russia's banking sector, even as the authorities have won praise for their handling of other aspects of the global crisis, notably the country's ruble devaluation.

The International Monetary Fund on Wednesday urged governments in the former Soviet Union to pay close attention to the health of their banks in order to alleviate the crisis, which is hitting the region especially hard. "It will be crucial to carefully assess bank balance sheets with a view to writing off bad assets in a proactive manner, determining which banks have sound medium-run prospects and replenishing their capital as needed," the IMF said in its six-monthly World Economic Outlook.