The central bank in Russia cut its vital interest rate by 0.5% points to 10.5% on June 10th, 2016, mentioning a stabilizing rate of inflation for the move.
Analysts had been divided over whether the Bank of Russia would maintain or reduce its key one-week repo rate from 11% on June 10th, 2016, with inflation remaining high and the economy in Russia shrinking.
According to a report by the central bank, for a third continuous month in May, inflation was7.3%.
Economists in Russia expect an economic recovery against a background of more steady inflation, reduced inflation prospects and inflation risks in the future.
Both corporate and the consumer have exited the freefall, but an economic recovery is still not happening. The rate cut could possibly not revive the household expenditure. However, inexpensive financing costs could decrease growth prospects for financial institutions and firms.
Decreasing inflation permits dependence on maintainable inflation reduction to below 5 percent in May 2017 and the 4 percent mark towards the end of 2017, based on the recent decisions and the expected moderately tight monetary policy.
The central bank also warned of a further rate cut, based on projections for inflation risks.
According to Capital Economics’ Liza Ermolenko, “the huge decline in Russian inflation had already taken place and that it would move upward over the short-term. “
Base effects would most probably increase the headline inflation over the coming months and it is expected to peak at about 7.8% year-on-year in the third quarter of 2016. This, combined with firmly high inflation prospects would mean that the central bank would not accept calls to ease monetary policy in order to boost the economic recovery.
After the announcement on June 10th, 2016, by the central bank in Russia, the Russian ruble increased to 64.75 to the US dollar from 64.64, before decreasing to 64.45.
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