Russia Cuts Key Rate to 11% in Bid to Spur Lending
Russia’s central bank cut its main interest rates for the fourth time in less than three months after the economy contracted 10.2 percent through May and government spending failed to reverse the decline.
Bank Rossii cut the refinancing rate to 11 percent from 11.5 percent and the repurchase rate charged on central bank loans to 10 percent from 10.5 percent effective July 13. The bank cut rates for the first time since 2007 on April 24 and again on May 13 and June 5.
“Despite the ongoing rate cuts conducted by Bank Rossii in April to June 2009, interest rates remain high,” the bank said in a statement. The latest reductions will lower borrowing costs and lead to the “restoration of lending activity of the banking sector.” The average rate in May for one-year loans for non- financial companies was 15.9 percent, the statement said.
The key interest rates of the world’s biggest energy exporter are among the highest in emerging markets, while its economic contraction is one of the steepest. Policy makers aim to spur lending and help pull the country out of its first recession since 1998.
Industrial production slumped a record 17.1 percent in May and capital investment shrank the most since December 1998, dropping an annual 23.1 percent. Inflation last month slowed to an 18-month low of 11.9 percent from 12.3 percent in May.
‘Small Step’
Previous cuts failed to revive lending, First Deputy Chairman Alexei Ulyukayev said in an interview last month. Lenders aren’t passing on the lower rates to companies on concern slumps in manufacturing and consumer demand may trigger a second wave of problems as companies fail to repay loans.
Lending to companies fell 1.5 percent in May compared with the previous month, while retail loans dropped 1.9 percent, the central bank said this week. Overdue bank loans reached 4.6 percent of the total in May, versus 4.2 percent a month earlier.
“It’s a small step toward reanimating lending,” said Stanislav Ponomarenko, a fixed-income analyst at ING Groep NV in Moscow. Rates need to be cut by as much as 4 percentage points to have an effect on lending, he said.
The central bank will watch the inflation rate as well as lending patterns and financial and currency markets as it sets its policy on rates in the future, the statement said.
‘Momentous Shift’
Consumer-price growth is slowing “intensively” and the inflation rate will be significantly less than the government’s original forecast, allowing the bank to continue cutting rates, Chairman Sergey Ignatiev told Russia’s parliament on June 24 business