Central Bank Cuts Interest Rates to Battle Crisis

By Paul Abelsky and Alex Nicholson

Bloomberg

Published: October 30, 2009 (Issue # 1522)

MOSCOW — The Central Bank cut its key interest rates to record lows to boost lending, stem speculative inflows and help carry the commodity-reliant economy out of its worst slump since official records began more than a decade ago.

Bank Rossii lowered the refinancing rate to 9.5 percent from 10 percent and reduced the repurchase rate charged on central bank loans to 8.5 percent from 9 percent, effective from Friday. The bank has cut the rates eight times since April 24. It last lowered them by half a percentage point on Sept. 29.

The decision was made “with the aim of additionally stimulating lending activity of the banking sector,” Bank Rossii said in a statement. “Reducing the difference between short-term interest rates on the internal and external markets will” also “reduce the attractiveness of short-term investments in Russian assets and stop the accumulation of risk on the stock and currency markets.”

The benchmark Micex stock index has almost doubled this year, out-performing Brazil’s Bovespa bourse and the MSCI Asia Pacific Index, while the ruble was the fourth-best performing emerging market currency between February and October of 26 tracked by Bloomberg. Earlier rate cuts have been slow to filter through to bank lending rates, hampering domestic demand and leaving companies short of the credit needed to resume investment and hire workers.

Businesses in the world’s biggest energy producer still lack funds to rebuild inventories and recover from last year’s slump in raw material demand. The economy shrank a record 10.9 percent in the second quarter and contracted a further 9.4 percent in the three months ended September.

“Today’s cut will do little to ease the pain for households and firms,” Neil Shearing, emerging markets economist at Capital Economics, said in an e-mailed note to investors. The central bank is likely to reverse the cuts if the oil price falls back to $50 a barrel next year, undermining the ruble, he said. “There is a good chance that the refinancing rate ends next year back in double-digit territory,” he said.

 The ruble maintained declines and was down 0.5 percent at 29.2924 against the dollar in Moscow on Thursday. It was little changed against the euro at 43.1796. Crude oil, Russia’s chief export, touched a one-year high of $82 a barrel on Oct. 21.

The current level of inflation and interest rates provides a “big opportunity” to cut rates further, Alexei Ulyukayev, first deputy chairman of the central bank, said in Moscow on Oct. 21. The bank may lower rates below 9 percent in 2010, he added.

The cuts “so far have not led to an increase in lending by banks or a comparable reduction in the interest rates on loans,” Audit Chamber head Sergei Stepashin said during parliamentary hearings last week.

Russia is the only member of the four so-called BRIC nations still cutting rates. India last lowered its reverse repo and repo rates in April, China reduced its lending rate in December and Brazil hasn’t cut its overnight rate since July.

The government of Prime Minister Vladimir Putin expects the economy of the world’s biggest energy exporter to contract 6.8 percent in the second half and 8.5 percent in 2009 on average, after growth of 5.6 percent in 2008 and 8.1 percent the year before. Output will grow 1.6 percent next year and 3 percent in 2011, the government estimates.

Recovery prospects still hinge on Russia’s financial system and a resumption of lending growth. Credit flows have faltered even after the rate cuts as banks remain concerned that borrowers can’t service debt and as asset quality deteriorates. Overdue bank loans rose to 5.8 percent of total lending in August from 5.5 percent a month earlier. Average interest rates charged on corporate loans declined to 14.5 percent last month after growing to 15.1 percent in August.

“High risks and uncertainty” continue to stifle corporate lending, Putin said last week.

The severity of Russia’s economic decline has undercut demand and may bring the inflation rate this year below the government’s target for the second time in a decade. Consumer prices grew an annual 10.7 percent in September, compared with 15 percent the same month last year and failed to grow for a tenth week in the seven days through Oct. 26.

“The usual seasonal October acceleration in inflation may well be smoothed by consistent ruble strengthening in the foreign-currency market,” said Anton Nikitin, an analyst at Renaissance Capital in Moscow. Producer prices, budget spending and an increased money supply aren’t creating enough pressure to fuel inflation, he said. “These conditions remain favorable for loosening monetary policy as early as October.”

Consumer-price growth this year may be “a little more” than 8 percent, Putin said in St. Petersburg on Oct. 25. That would be the slowest annual average pace of inflation since records began after the collapse of the Soviet Union in 1991.