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Russia Cuts Interest Rates for Fifth Time This Year --Update

DOW JONES & COMPANY, INC. 7:55 AM ET 7/31/2015


MOSCOW--The Bank of Russia cut interest rates on Friday for the fifth time so this year, citing economic risks, but declined to commit on whether there would be further monetary easing.

The central bank slashed the key rate by 50 basis points to 11%, in line with the market consensus, taking its total cuts so far this year to six percentage points. Still, the key rate remains above the 10.5% level it was at in early December, before an emergency increase to 17% that helped to stabilize the plummeting ruble.

The Bank of Russia painted a dire economic picture, saying that contraction of gross domestic product intensified in the second quarter compared with the first three months of 2015, while oil prices, vital to the economy of this hydrocarbon-producing country, have little chance to recover.

"The economic situation in Russia will further depend on the dynamics of world energy prices and the economy's ability to adapt to external shocks. At the same time the scenario with oil prices remaining below $60 per barrel for a long time is more probable than it was in June," the central bank said in a statement.

The ruble weakened following the rate move to 60.88 versus the dollar from levels of 60.3 seen before the monetary decision.

Given that consumer demand, the economy's key driver, is falling faster than expected, the central bank warned it may worsen its full-year economic forecast. Data showed earlier this month that retail sales, the key gauge of the consumer demand, fell by 9.4% in the second quarter compared with the same period a year ago.

Hit by oil prices that halved from a year ago together with Western sanctions, Russia's economy has slid into recession for the first time since 2009 and, according to the government, will shrink by up to 3% this year.

But unlike in June, this time the central bank's statement contained no commitment to cut interest rates further despite strong economic headwinds. Analysts had warned that the renewed ruble weakness in recent weeks, mostly driven by a slump in oil prices, is scuttling hopes for further cuts to the central bank's lending rates to revive the country's economy this year.

"The Bank of Russia will further decide on its key rate depending on the balance of inflation risks and risks of economy cooling," the regulator said.

The central bank is trying to tame stubbornly high inflation without sending the economy into a deeper recession. Earlier this week, the central bank suspended daily purchases of dollars and euros for its reserves, as the ruble dropped to weakest levels since March.

But inflation has been boosted last year by a rapid devaluation in the ruble as well as by Moscow's ban on food imports from countries that imposed economic sanctions on the country. The central bank said annual inflation stood at 15.8% in late July, flying high above the central bank's target of 4%.

The next rate-setting meeting is scheduled for Sept. 11.

Write to Andrey Ostroukh at [e-mail]


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