Russian Central Bank Defends Its Independence After Surprise Rate Cut 

Ruble Slides Lower Against the Dollar

The Bank of Russia has defended its independence after Friday’s surprise cut in interest rates raised concerns about the influence of the Kremlin, industrialists and bankers over the central bank’s policy.

Amid complaints that Russia’s double-digit interest rates are stifling business, the bank said its directors alone are responsible for Russia’s monetary policy.

“The Bank of Russia takes into account views of businesses, the government and the academic community,” the Bank of Russia said.

“But the decisions on the key rate level are within the exclusive competence of the central bank’s board of directors,” the central bank said in an emailed comment late on Friday.

The comment, requested by The Wall Street Journal, followed the central bank’s decision unexpectedly to lower its main lending rate to 15% from 17% on Friday just weeks after it had increased the rate from 10.5%. The Bank of Russia had yanked rates higher after an emergency meeting in December in an attempt to put a brake on the ruble’s slide against the dollar and the euro.

The central bank explained the latest rate cut by saying monetary policy still remained tight enough to tame Russia’s burgeoning inflation.

Some investors and analysts have said the unexpected move raised doubts about the central bank’s ability to withstand pressure from the Kremlin and powerful domestic interests to rekindle economic growth with easier money, even at the expense of rising inflation and pressure on the currency.

Russia’s monetary authorities have to be “cautious with their rate policy and refrain from moving policy-easing forward” as there are signs of mounting inflationary pressures in the economy, said Alexander Morozov, chief economist at HSBC in Moscow. Such price pressures increase the probability of Russia’s economy reaching a state of “bad equilibrium” of rising inflation and falling demand, Mr. Morozov said.

With the economy heading for recession this year, the central bank had appeared hesitant last year to raise rates steeply for fear of further depressing growth. That was before further declines in oil prices sapped confidence in the ruble and the outlook for Russia’s energy-dependent economy.

The ruble continued to fall in value on Monday having dropped below 72 to the dollar, its lowest level since December, after Friday’s rate cut. Despite a rally in oil prices and another verbal intervention by the central bank, the ruble was down nearly another 2% at 70.2 to the dollar in late-morning trading on Russian markets.

Elvira Nabiullina, the head of the central bank, said she sees no reasons for further weakening in the Russian currency, with the ruble now down by 20% against the dollar so far this year.

“We don’t see any big factors that would drive the ruble’s depreciation. In our view, there are more reasons for appreciation that for more weakening,” Ms. Nabiullina said on the state-run TV Channel One late on Sunday.

Talking up the currency and monetary policy are the central bank’s main tools for supporting the ruble after the bank let the currency float freely on currency markets after spending billions of dollars last year in a fruitless attempt to shore up the currency.

President Vladimir Putin and other Russian officials have repeatedly said that Moscow won’t “burn its reserves” accumulated over years of buoyant oil prices in defending the currency. In 2014, the international reserves fell by more than $120 billion.

Ms. Nabiullina said that there were no risks of a rapid depletion of the reserves now. The central bank had no plans to spend the reserves in the same manner as it did last year. Russia’s reserves stood at $378 billion in late January, their lowest level since 2009.

Source: wsj – Russian Central Bank Defends Its Independence After Surprise Rate Cut

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