Russia cuts benchmark refinancing rate to 8.75 percent

Russia's central bank in an expected decision on Friday unveiled its 10th interest rate cut of the year, with economists expecting more gradual cuts in coming months to stimulate the country's blighted economy. The central bank said it is reducing its benchmark refinancing rate to 8.75 percent effective from Monday, December 28, from 9.00 percent.
The minimum one-day repo rate will be cut to 6.00 percent from 6.25 percent. "The decision to cut rates is expected to soften the factors restraining economic revival and will secure the stability of the growing trend of GDP," the regulator said in a statement. Russia lost a tenth of its GDP value in the first half of the year in the country's worst recession in a decade.
There have been incipient signs of recovery, aided by rising oil prices and improving global economic outlook, but the revival has been slow and uneven. Domestic demand - a major contributor to Russia's robust growth for most of the decade - is not picking up and unemployment still claims 8.1 percent of its labour force.
And the 10 gradual rate cuts, which brought down the refinancing rate by a total of 425 basis points since April, have failed to achieve its main goal - spur lending to the real sector of the economy. The central bank said in its statement that even the small gains in industrial output in November came unsupported by lending.
"We have not seen a significant improvement in credit activity among Russian banks," the regulator said. The central bank is also counting on the cut to limit the inflow of short-term speculative capital that has been increasingly flooding Russia in recent months from investors seeking fast gains from carry-trade operations.
However, the rates in Russia will still remain significantly higher than the 1 percent or smaller rates among the other G8 economies. "I do not think that the cut will have an essential impact on carry trade," said Dmitry Kharlampiev, analyst at Petrocommerce Bank.
The central bank said that it is expecting that volatility on the foreign exchange market will continue, warning of risks related to the exchange rate. At 1035 GMT, the rouble traded virtually unchanged from previous session at 36.48 against a dollar-euro basket the central bank uses for guiding the currency's nominal exchange rate.
The lower-than-expected inflation rate has been the chief contributor allowing the regulator to move with the gradual rate reductions. The central bank also said that the risks that 2010 inflation will exceed official forecast are "insignificantly" small. The Ministry for Economic Development sees next year's inflation at 6.5-7.5 percent.
Economists said that the good inflation outlook will likely encourage the central bank to administer a few further rate cuts. "We expect that cuts will continue in the beginning of next year," said Artyom Arkhipov, chief macroeconomic analyst at Gazprombank, adding that he sees a 25 basis points cut in the first quarter of 2010 and a 50 basis points cut in the second.