Facing the economic stings of falling oil prices and Western sanctions, the Central Bank of Russia unexpectedly reversed course on Friday, lowering its crucial interest rate after a year of increases.
Most analysts had expected the central bank to keep interest rates high to help prop up the ruble, which has been plummeting against nearly every other currency in the world. The ruble has lost roughly 50 percent of its value over the last year.
However, the central bank is stuck in a tough spot, as high rates seemed to be pushing the banking industry toward a financial crisis and further crimping growth. In downgrading Russia’s sovereign debt rating to junk status this month, the credit rating agency Standard & Poor’s, in part, cited the central bank’s limited options.
The rate cut suggested that Russia viewed the banking troubles as a more pressing worry than the high inflation caused by the declining value of the ruble. Inflation is now about 13 percent.
“Today’s decision,” Bank of Russia Governor Elvira Nabiullina said, “is intended to balance the goal of curbing inflation and restore economic growth.”
Russia is fighting a swirl of forces. The oil-dependent economy has been battered by the low price of crude, which is down more than 50 percent since last summer. Western sanctions over the Ukraine crisis have only complicated matters, particularly for Russia’s banks. The economy is expected to fall into recession this year.
The difficult environment has left the central bank grappling with how to respond.
In December last year, the bank raised rates 6.5 percentage points to 17 percent in an only partly effective effort to stem panic-selling of the ruble; selling continued all the same. On Friday, the central bank partly rolled back the increase, reducing rates 2 percentage points, to 15 percent.
The reversal reflects the shifting priorities of Russian President Vladimir Putin’s government in maintaining a stable exchange rate for the ruble, once considered one of the accomplishments of his rule after the economically chaotic 1990s.
On Friday, the value of the ruble, which dropped sharply after the rate cut, eventually ended at 69.50 to the US dollar. Just a year ago, it traded around 35 to the US dollar.
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