Bank of Russia key rate moderately down

On January 30, 2015 the Bank of Russia Board of Directors made a decision to lower the key rate to 15% from 17%. The interest rate was lowered "due to the shift in the balance of risks of accelerated consumer price growth and cooling economy", explained the Central Bank of Russia.

As a reminder, the fast-track rise of the key rate to 17% from 10.5% was a response by the monetary authorities to the turmoil developed in the foreign exchange market, when the ruble-euro and ruble-dollar exchange rates neared very close to 100 rubles per Euro and 80 rubles per US dollar, respectively. Seeing the exchange rate stabilization as then primary objective, the Central Bank tightened vigorously its monetary policy. This produced side effects such as higher credit risks and hence banking crisis risks, as well as set back economic growth due to a credit crunch. Given these circumstances, as well as the fact that the ruble's exchange rate dynamics stabilized widely, the Bank of Russia decided to moderately lower the interest rate.

This decision implies that the Central Bank of Russia has abandoned the objective of restraining inflation for growth promotion purposes. Based on the regulator's estimates, prices are expected to grow at a slower rate in the second half of 2015 by virtue of the depleted exchange rate pass-through effect to prices and business contraction. The interest rate lowering on the 30th of January may likely to be considered a signal to market players that the Bank of Russia is set up to gradually lower the interest rate as inflationary risks are mitigated.

Eugeny Goryunov, researcher at Gaidar Institute