Russia's central bank cut its main interest rate for the first time since June 2010 on Friday in a bid to shore up its fragile banking sector against European contagion and continued capital flight. The bank said the drop of 25 basis points to 8.0 percent was "based on the assessment of inflationary risks and risks to stable economic growth, including those caused by uncertainty over the foreign economic situation."
The surprise move marks the first time that rates have come down in Russia since June 1, 2010 and underscores mounting concerns over how sovereign debt problems in Europe could impact lending and investment at home. Russia raised rates for the first time since the 2008 global financial crisis in May 2011 when inflationary pressures began to threaten its cautious recovery.
But officials have since voiced much greater concerns about slowing growth knocking down the price of energy exports on which the Russian economy is based and contributing to investor flight from more risky emerging markets. President Dmitry Medvedev warned starkly on Thursday that a "global economic depression could last several years" and called for new efforts to step up the country's business competitiveness.
The central bank said that it had a strong handle on inflation and did not expect rising prices to threaten the economy until the middle of 2012 at the earliest. It reported an annual inflation rate of 6.4 percent for this month compared to 6.8 percent in November - both figures well within government forecasts.
Analysts said the easing was sparked in part by concerns that the threats of a banking liquidity crisis were becoming increasingly evident. "Despite the year-end budget spending splurge, the banking sector has not yet (seen) any significant inflows to corporate or retail accounts," Moscow's Alfa Bank said in a research note. Russia's overnight lending rate reached a new high of 6.5 percent on Friday in a sign of how hard it was becoming for banks to gain access to funds.
The central bank said the lower refinancing rate "should help limit money market rate volatility" and revive shrinking business investment. But it also left the overnight lending rate unchanged at 5.25 percent in an attempt to give itself more room for future manoeuvre. Most economists had not expected the central bank to move on rates at all until next year.
The bank's decision is particularly dramatic because it is likely to further weaken the ruble - a move that may only add to voter displeasure in the run-up to presidential elections in March. The sensitive currency has suffered from political uncertainties about Vladimir Putin's return to the Kremlin and the recent wave of protests that followed disputed parliamentary elections on December 4. Investor capital outflows reached $18.6 billion in the third quarter and are now expected to reach $85 billion for the year - more than five times the 2010 figure.