Refinancing rate cut to head rouble speculators off and ease lending
In the central banks 11th consecutive cut to Russia’s key refinancing rate, since last April, a further 25 basis points bought the rate to 8.5% – an all time low.
The sharp drop in inflation – from a high point of 13.4% in January 2009 to 8% at the end of the year – has given policymakers room to move on rates, and hopefully boost the economy by reducing borrowing costs. Mark Rubenstein, Deputy Head of Research at IFC Metropol says rate cuts are the biggest priority for the economy.
“The most important priority is bringing down the interest rates in the economy – overall interest rates in the economy. That is mostly, I am talking about lending rates for the Russian corporates and for the Russian retail customers.”
Russian monetary policy is responding to different pressures to major developed economies. Although Federal Reserve Chairman, Ben Bernanke, made it clear to congress on Wednesday that US rates would remain at exceptionally low levels for an “extended period,” most commentary views the next interest rate move there – when it comes – to be up. Similarly, interest rate rises for the ECB and Bank of England are seen as a matter of when, and not if. China spooked global equities market recently by acting to restrict monetary policy, through increasing reserve requirements for banks.
By contrast Dmitry Dmitriev, Head of Financial Institutions at VTB Capital says Russia’s economic needs mean looser monetary policy and lower interest rates could be in store, and that the ultra low rates globally are part of the issue.
“We may well see further decline of the interest rates, and not only because we need to boost the credit growth, but because the world's rates are very low now, we need to think how to prohibit all these carry trades which investors are doing putting speculative pressure on the Russian currency.”
The major high street banks have largely resumed lending which collapsed at the peak of the global financial crisis, and the prolonged fall in the Central Bank rate means their loans are becoming cheaper.
But the cut has had little effect on the strengthening Rouble against the dollar or the Greek budgetary crisis hit Euro. It has remained relatively steady against both, reflecting to some extent speculative positions taken in the Russian currency by those borrowing at ultra low rates elsewhere. With the crude price – a key driver for the Russian economy – also boosting the Russian currency, and likely to move higher still at the first sign of a global economic rebound, the Central Bank may have to move to cut rates further, as the Rouble becomes a surer bet for those with cheap cash.