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Russia's central bank on Friday cut its key interest rate, after raising it massively in December to shore up the ruble, in a bid to underpin economic activity that remains hurt by falling oil prices and economic sanctions.
The Bank of Russia Board of Directors decided to reduce the key rate to 15.00 percent from 17.00 percent. Economists had expected the bank to retain the policy rate.
"The decision taken is aimed at averting the sizeable decline in economic activity against the background of negative external factors," the bank said. The West targeted Russia and some of its citizens with economic sanctions after the annexation of Crimea by the country and the standoff with Ukraine.
On December 15, the central bank unexpectedly hiked the rate to 17.00 percent from 10.50 percent, just a week after raising it by 100 basis points. The hikes were aimed at limiting the slide in the ruble and risks to inflation, the bank had said. Interest rates were raised six times last year.
At the start of this week, Standard & Poor's downgraded Russia's sovereign credit rating to below investment grade for the first time in more than a decade. The rating agency cut the country's sovereign credit rating to "BB+" from "BBB-". The rating outlook is negative.
Earlier this month, Fitch Ratings downgraded Russia to its lowest investment grade, followed by Moody's Investors Service.
The central bank attributed the rate cut to "the shift in the balance of risks of accelerated consumer price growth and cooling economy". The massive hike in December led to stabilization of inflation and depreciation expectations to the extent expected, the bank said.
The bank forecast inflation to be lower than 10 percent in January 2016 and said the current surge in inflation was due to accelerated price adjustment to the ruble depreciation being time-limited. Inflation pressure will be curbed by slowdown in economic activity, the bank said.
In 2014, Russia's inflation was 11.4 percent and core inflation was 11.2 percent. Monthly inflation was forecast to ease slightly this month from 2.6 percent in December. However, the bank expects annual inflation to continue the upward trend with a peak in the second quarter of 2015.
"The ruble depreciation will further affect the prices of goods and services contributing to the likely increase in annual inflation in the next months," the bank said.
"Nevertheless, inflation and inflation expectations are forecasted to decrease as the economy gradually adjusts to changing external conditions and the impact of the exchange rate dynamics on prices exhausts."
Further, subdued aggregate demand as well as slightly tight fiscal policy would also lead to slowdown in consumer prices, the bank added.
The bank also estimated 2014 economic growth at 0.6 percent and predicted 'substantial decrease of output' due to falling oil prices and foreign economic sanctions on Russian borrowers. It forecast -3.2 percent growth for the first half of this year.
Russian central bank policymakers will on March 13 to decide on interest rates.
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