The Bank of Russia has moved to slash its discount rate once more, by another 0.25 percentage points. Starting February 24, 2010, the rate will be set at 8.5 percent per annum, the Bank of Russia said. As the Bank of Russia announced, the next meeting of its board of directors to consider the interest rates will be held in March 2010. “Any further moves to change the interest rates will be made with the inflation trends factored in, as well as the dynamics of production operations, and the situation on the domestic financial market,” the bank said in a statement. The Bank of Russia also noted that the interest rates were lowered largely due to favorable consumer price index dynamics. As of February 15, annual inflation slid to 7.6 percent from 13.4 percent at the same point a year earlier. The lack of any significant risks of inflation gaining momentum or an increase in its official forecast for 2010 also played a part in the decision. Meanwhile, the major indicators of the production industry (investment, employment) and consumer demand (real personal incomes, retail loans) have remained below the pre-crisis level, which is key to explaining the unstable domestic demand. “The Bank of Russia's rate action is expected to promote favorable conditions for sustained economic growth to recover,” the bank’s statement reads. With high liquidity in the banking sector, the decrease of interest rates also aims to limit the influx of short-term foreign capital. Yet, considering such external factors as the relatively sluggish growth of the global economy and heightened sovereign risks in certain countries, the Bank of Russia admits that volatility could very well increase on the domestic currency market, meaning the respective currency exchange risks can go up. As reported earlier, the Bank of Russia downgraded the discount rate nine times last year, starting from 13 percent. The most recent cut was made on December 25, 2009, when the rate was brought down from 9 to 8.75 percent. It should also be noted that the 8.5 percent level was a record low for Russia. Never before had the rate dipped below the 9-percent benchmark. Earlier, the Central Bank’s First Deputy Chairman Alexei Ulyukayev confirmed that the bank could hike up the rates in the second half of 2010. “An increase in the rates in the second half of 2010 is quite likely. Just like the rest of the world, we will progress from the downward cycle to stabilization, and then, perhaps, increase,” he said. According to Ulyukayev, Russia started lowering the rates with a certain time lag, so it will take the bank that much longer to start raising them again. “Russia is moving with a time lag. There will be a certain period of stabilization, which will most likely be followed by an increase depending on inflation risks in 2010,” he stated.
