Russia: Central Bank lowers interest rates to 15%

Unexpectedly, Russia’s Central Bank cut its interest rate by two points, citing a lower risk for inflation given the impending recession and low growth rates. The ruble weakened again against the dollar after the announcement to 72, its lowest level since December. Western economists cited their surprise at this development, and expressed concern that the Russian Central Bank was enacting practices of complete unpredictability, causing more stress in the exchange rate and financial markets than necessary.

The Central Bank defended the decrease, stating that the 13.1% inflation rate would likely fall in the coming months due to lower spending overall within the domestic economy, noting that the inflation itself is fueled by exchange rates and not by rising wages. However, they promised that inflation would not fall below 10% until January of next year, adding some doubt to their reasoning. The new rate cut, according to the statement, was cited as a chance to “kickstart” lending. One of the largest fears of the Russian government is the increase in capital flight and foreign direct investment from the economy, adding that coupling that with falling real incomes and tightening consumer credit would devastate the economy further.

Thus, it appears the Central Bank is attempting to spur lending, as one of the primary issues for the government are the dollar reserves they are spending to allow domestic companies to refinance and to prop up their value in the international financial markets. This moves seems designed around encouraging domestic lenders to shoulder some of the burden and increase the viable amount of time the Russian government can use these cash reserves.

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