The Bank of Russian Federation painted a dire economic picture, saying that contraction in gross domestic product intensified in the second quarter compared with the first three months of 2015, while oil prices, vital to the economy of this hydrocarbon-producing country, have little chance to recover.
Russia’s war against Ukraine has led to Western sanctions on the Russian economy and last year’s collapse of oil prices plunged Russia into a financial crisis that has since become a deep recession.
While ruble weakness is beneficial for Russian Federation by offsetting the effect of falling oil prices on the national budget, the downside is that it boosts the price of imported goods and risks driving inflation already 11 percentage points higher than the official target.
“The recent fall in the ruble triggered a clear shift in the [Central Bank] Council’s tone, and policymakers are no longer committing themselves to lowering interest rates further”, Capital Economics said in a note.
The Fed has been following a policy on low interest rate since 2008, keeping its key rate now at a record low of 0.25 percent.To increase the rate, the US is waiting to get enough evidence its economy is robust enough, with a 2 percent inflation rate being one of the benchmarks.
The decision “indicates that the central bank is looking to strike the right balance between the desire to continue cutting rates and the need to keep inflation under control”, said Ivan Tchakarov, chief economist at Citigroup Inc.in Moscow. It hit 15.8% in July, according to central bank estimates. Money supply (М2) growth rate remains low. On June 15, the bank cut its key rate by 100 points.
But the continuation of a policy of monetary easing indicates that the central bank is trying to revive the battered economy without letting the rate of inflation rise. These factors along with the decline in retail lending will result in further contraction of consumer spending. Today attention is focussing on the central bank’s rate decision.
original source: http://www.dispatchtimes.com/russia-s-central-bank-cuts-key-interest-rate-to-help-spur-economy/26556/