Russian central bank cuts key rate to 10.5%

Russia’s central bank cut its main interest rate by 0.5 percentage points on Friday to 10.5%, justifying the move by the country’s steadying rate of inflation.

“The Board of Directors notes the positive trends of more stable inflation, decreased inflation expectations and inflation risks against the backdrop of imminent growth recovery in the economy,” the Bank of Russia said in a statement.

“Slowing inflation allows more certain reliance on sustainable inflation reduction to less than 5 percent in May 2017 and the 4 percent target in late 2017, taking into account the decision just made and the retention moderately tight monetary policy.”

Before the move, analysts were split as to whether the bank would hold or cut its one-week repo rate from 11%, with inflation still sky high and the Russian economy contracting.

The country’s inflation reading came in at 7.3% for a third consecutive month in May, according to official Bank of Russia figures.

A possible further cut to the rate was also flagged by the bank based on its estimates for inflation risks.

However, earlier this week economists were saying the projected big drop in inflation had already occurred.

“Base effects are likely to push up the headline inflation rate over the coming months and we expect it to peak at around 7.8% year-on-year in the third quarter of this year,” said Capital Economics emerging markets economist Liza Ermolenko.

“This, coupled with stubbornly high inflation expectations, feeds into our forecast for the central bank to continue to resist calls to ease monetary policy in order to support the economic recovery.”

The Russian ruble strengthened sharply after the announcement, but was last 0.12% weaker at RUB 64.3994 per USD.