Finance News

Bank of Russia cuts discount rate - a historic low for Russia

The Bank of Russia slashed its discount rate by another 0.25 percent from April 30. Starting tomorrow, the rate will be 8 percent per annum – a historic low for Russia.

This marks the third decrease in the discount rate this year, down from 8.75 percent. Yet, for the first time in the last year and a half the regulator hinted that all these reductions would soon come to an end, and a gradual toughening of the monetary policy was already in sight.

The Bank of Russia acknowledged that inflation could gain momentum in the second half of 2010 as a result of the low base effect. As the regulator indicated in a press release, if annual inflation continues to decline in the short term, the factor could call for more careful consideration regarding further discount rate moves.

After carefully looking over the document, analysts have come to the conclusion that the Central Bank is about to put an end to a year-long cycle of discount rate cuts. Some experts say that if the economy continues to recover and shows clearer signs of a revival in credit activity, there will be no more cuts.

Bank of Moscow expert Yekaterina Gorbunova believes that the new rate cut by the Central Bank may substantially improve investor sentiment. “Since uncertainty as to whether the Bank of Russia would or would not cut the rates again this month had persisted up until today, the ruble bond market may respond to the rate action with a rally,” she said.

According to the expert, the period of the soft monetary policy is nearly over, so the move to cut the rates will have limited influence on the market. “Today’s action may prompt some investors to keep securities in their portfolios over the May holidays, but it is unlikely to prevent foreign investors from cutting their positions in ruble-denominated assets against the backdrop of instability in the European Union,” Gorbunova opined.

Source: RBC
Date: 04.05.2010 [ID: 246]

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