By Andrey Ostroukh
MOSCOW--The Bank of Russia cut interest rates on Friday for the
fifth time so far this year, citing economic risks, but declined to
commit on whether there would be further monetary easing.
The central bank cut the key rate by half a percentage point 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 10.5%, the level it was at in early December, before an
emergency increase to 17% that helped to stabilize the plummeting
ruble.
The cut is smaller than a month ago, when the central bank
slashed rates by one percentage point. But the continuation of a
policy of monetary easing indicates that the central bank is trying
to revive the battered economy without letting the rate of
inflation rise.
Even though a pause in the monetary easing cycle is possible,
more rate cuts are likely later this year, with inflation set to
slow anyway thanks to the so-called 'base effect.'
"The CBR's decision was primarily driven by the need to
alleviate the policy stance considering that growth risks increased
more than inflation risks since the previous meeting in June," said
Oleg Kouzmin, chief economist at Renaissance Capital in Moscow.
Analysts predict further cuts later this year, with the key rate
likely to fall to around 10% or even lower by the year-end. But at
the next rate-setting meeting on Sept. 11, the central bank could
put rates on hold as there are risks that the ruble may weaken
substantially should the U.S. Federal Reserve eventually tighten
its monetary policy.
VTB Capital said in a research note that the Bank of Russia is
likely to prefer switching to a 'wait-and-see' mode to assess the
balance of risks from the Fed's possible rate hike, which is
expected at its meeting on Sept. 16-17.
"Tighter fiscal and looser monetary policy with a softening (but
not collapsing) ruble exchange rate would amount to the optimal
policy mix for getting Russia out of its present economic hole,"
said Christopher Granville, head of emerging market research firm
Trusted Sources.
The Bank of Russia painted a dire economic picture, saying that
contraction in 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.
Battered by another slide in oil prices, the ruble weakened
following the rate move to 61.15 against the dollar, a level last
seen on March 18. It stood at 60.3 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 sweeping 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 its weakest levels
since March, posing new inflationary risks. Annual inflation stood
at 15.8% in late July, well above the central bank target of 4%
The suspension of interventions of up to $200 million a day will
lift additional pressure on the ruble in the second half of this
year, the central bank said in an emailed comment on Friday.
Write to Andrey Ostroukh at andrey.ostroukh@wsj.com