The Strategist

Russia Lowered Interest Rates – To Ease Struggling Economy

03/16/2015 - 19:34

Key rate was lowered for the second time in an attempt to accelerate the economy.

Russia Lowered Interest Rates – To Ease Struggling Economy
Central bank of Russia slashed it interest rate by 100 basis points to 14% in an effort to stimulate its struggling economy on 13th March 2015. As the economy is faltering, the inflation rate drops down. This move point towards regaining back of confidence and also that the worst scenarios of economic uncertainty and financial turmoil due to Western sanctions in response to Ukraine’s conflict and collapse in crude oil prices that serves as the economy’s major export, are coming to an end. After experiencing a collapse in 2014, the Russian currency has now stabilized. In 2014, the ruble witnessed a steep decline of nearly 46%. In January 2015, the interest rates were lowered from 17% to 15%. However, the interest rates were hiked to 17% in 2014 in response to a steep sink in its currency, with the aim to boost savings.

Economic performance data revealed that consumer spending, investment plans, GDP as well as real wages, all were plummeting at a much rapid pace than expected. This signaled that the Russia is heading towards steep economic recession. The Central Bank pointed out that this step was taken mainly, due to the increased concerns about economic downturn rather than inflation. However, the consumer prices are surging at 16.7% y/y, the highest mark over the past 13 years. According to the central bank’s predictions, the GDP growth is expected to drop to 3.5% to 4% in 2015. The bank further predicts, that the economy will continue to contract by 1% to 1.6% in 2016. While, it is expected to rebound back in 2017, with more than 6% growth.

As a result of US and UN sanctions, many Russian companies are unable to borrow funds from Western banks. The steep slide in Ruble and food import ban by Russia in retaliation to the EU and the US sanctions fuelled inflation in February 2015 to 16.7%, as compared to 15% in January. The central bank predicts that the inflation is likely to end the year 2015 at about 12% to14%, as the economic growth continues to deteriorate. January’s rate cut was driven by business sector.  And these forecasts are based on the assumptions that the Western sanction against Russia will be lifted by July 2015.

Russia is evidently determined to ease down the tight monetary policy implemented in 2014, in response to substantial decline in ruble. The central bank is planning to continue to lower the interest rates by 100-200 basis points as long as the Russian currency, ruble is stable. The step is aimed to ease down the burden on Russia and decrease the risk of potential recession. The Bank of Russia projects, that the inflation rate target of nearly 4% will be achieved in 2017. The monetary easing along with slowdown in economic activities will together facilitate pulling down the consumer prices. As some of the banks in Russia are blocked from international debt markets due to the western sanctions, the economy is witnessing staggering consumer expenditures and hindrance in investments.