Russia Central Bank Unexpectedly Cuts Rate

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Russia's central bank unexpectedly slashed its key rate by 300 basis points on Friday, citing challenging external conditions.

At an unscheduled meeting, the Board of Directors of Bank of Russia decided to cut the benchmark rate to 17.00 percent from 20.00 percent.

The bank said today's decision reflects a change in the balance of risks of accelerated consumer price growth, decline in economic activity and financial stability risks.

On February 28, the central bank had hiked its interest rate sharply to 20.00 percent from 9.50 percent. The bank said the decision had helped to sustain financial stability and prevented uncontrolled price rises.

Signaling monetary policy easing, the central bank today said it "holds open the prospect of further key rate reduction at its upcoming meetings."

The central bank noted that there is a steady inflow of funds to fixed-term deposits. Although inflation is set to continue to rise due to the base effect, latest weekly data suggested a noticeable slowdown in the current growth rates.

It is clear that the central bank assessed that Russia's economy is now emerging from the most acute phase of its crisis and that such restrictive monetary conditions are no longer warranted, Liam Peach, an economist at Capital Economics, said.

"If the experience of the 2014/15 ruble crisis is any guide, a large interest rate cut (like that seen today) is likely to be followed by much more gradual easing as the CBR targets a large positive real interest rate to bring inflation back down to its target," said Peach.

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