Russia Cuts Benchmark Rate a ‘Cautious’ Quarter Point

By Alex Nicholson and Paul Abelsky

Aug. 7 (Bloomberg) -- Russia’s central bank said it reduced its main interest rates by a “cautious” quarter of a percentage point as it attempts to spur lending without triggering faster inflation.

Bank Rossii cut the refinancing rate to 10.75 percent from 11 percent and lowered the repurchase rate charged on central bank loans to 9.75 percent from 10 percent, effective from Aug. 10. The bank has cut the rates five times since April 24.

“The lending activity of banks remains low and rates for most borrowers are high, which stalls the recovery of economic growth,” the central bank said in a statement. At the same time, the bank’s board of directors opted for a “more cautious cut” after annual inflation accelerated to 12 percent in July.

Prime Minister Vladimir Putin last month urged bankers on the receiving end of government bailout funds to lend at no more than the refinancing rate plus three percentage points in a bid to boost flagging industries hit by Russia’s first recession in a decade. Unlike the U.S. and Germany, where recessions have led to annual declines in prices, Russia’s economic slump has had a limited impact on inflation.

“While today’s 25 basis point reduction may suggest a change in pace of the easing-cycle, further cuts in the official refinancing rate, perhaps to 10 percent, are possible over the coming Months,” David Oxley, emerging Europe economist at Capital Economics, said in an e-mailed note.

The “minimum” rate at which banks can lend is 15 percent to 16 percent and Bank Rossii should cut rates below 10 percent, said German Gref, head of the country’s biggest lender, OAO Sberbank.

Markets

Sberbank fell 2.1 percent after the central bank’s cut, which sent the ruble down 1.1 percent to 31.6191 per dollar. The 30-stock Micex Index slid 1.9 percent to 1,071.65 at 1:26 p.m. in Moscow, the steepest decline since July 28.

Policy makers were expected to lower the refinancing rate to 10.5 percent this month, in a Bloomberg survey of 15 economists published on Aug. 5.

Russia’s economy shrank 9.6 percent in June from the same month a year ago and grew 0.1 percent from the previous month, Deputy Economy Minister Andrei Klepach was quoted as saying by state news services on July 23.

The economy may start to show signs of recovery in the third quarter this year, he said, while acknowledging “risks” of a second wave of the crisis at the start of 2010 if companies have solvency problems.

More Cuts

After slowing for three consecutive months, consumer prices accelerated in July to an annual 12 percent from 11.9 percent in June. Falling domestic demand and a contraction in money supply will have a “substantial” effect on restraining consumer price growth, Bank Rossii said in the statement.

Lending to consumers dropped 1.1 percent for the fifth consecutive monthly decline in June and banks shrank their corporate loan books by 1.2 percent, the central bank said on July 30. Overdue bank loans reached 5 percent of the total in June, versus 4.6 percent a month earlier.

“We continue to expect the CBR will cut another cumulative 75 basis points by the end of the year, due to continued deterioration of lending conditions and economic weakness,” Vladimir Osakovsky, an economist at UniCredit SpA in Moscow said in an e-mailed note today.

‘Considerable Volatility’

Policy makers may cut the rate to 10 percent by the end of the year, according to the median estimate of 15 economists surveyed by Bloomberg.

Before April, the central bank raised rates to discourage investors from borrowing rubles to bet against the currency as collapsing global demand saw the price of oil tumble over a $100 per barrel between July last year and December.

In its statement the central bank said “considerable volatility” in the ruble’s exchange rate was “possible” as the central bank moves toward a more flexible exchange rate regime.

To contact the reporters on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net;