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Source: www.asiaecon.org |

RUSSIA TO LOWER INTEREST RATES?


As Russia struggles with high inflation rates, it has been forced to keep interests rates equally high. But as inflation rates drop, many believe the government may be finally ready to ease their reluctance and officially cut rates.


As Russia struggles with high inflation rates, it has been forced to keep interests rates equally high. But as inflation rates drop, many believe the government may be finally ready to ease their reluctance and officially cut rates.

The Central Bank has been taking flak from all sides lately over its insistence on maintaining what critics call “crippling” and “bankrupting” interest rates, a policy endorsed by the prime minister to keep lenders operating above the level of inflation.

Previously, Russia could not afford to cut interests rates to lower levels than inflation, as it would represent a serious threat for the economy, Prime Minister Vladimir Putin said in early March. “If inflation is 13 percent, we cannot set the rates lower than that, it will destroy the economy,” Putin said.

But in a reversal that could bail out bankers and borrowers, First Deputy Chairman Alexei Ulyukayev said Friday that the bank could begin cutting rates as soon as next quarter. Many Russian companies and politicians want lower rates to make borrowing more affordable for cash-strapped companies and to help the economy through its first recession in a decade.

The comments, made in an interview on Ekho Moskvy radio, reflect a growing confidence that inflation will begin to subside as production plummets and the devalued ruble starts to regain ground against a falling dollar.

The country’s benchmark rate, the refinancing rate, has been at 13 percent since Dec. 1, although interbank rates have fluctuated wildly since then, at times passing 20 percent. The government forecasts full-year inflation of 13 percent to 14 percent, roughly the same as in 2008.

“I think it’s entirely reasonable to expect a lowering of the refinancing rate in the second quarter, along with majority of our other instruments. ...It’ll be a little step, but it’s important for us to define the tendency,” Ulyukayev said.

If the currency remains stable and outflow stagnates, the Central Bank will likely stick to its word to reduce interest rates in April, said Yevgeny Nadorshin, chief economist at Trust Investment Bank. The cut, however, would likely be as little as half a percentage point, he said, hardly what banks would like to see.

At the moment, central bank interest rates can run high as 15 percent to 19 percent, a striking contrast with the rates in the United States and England, which are now lower than one percentage point.

Mayor Yury Luzhkov, the harshest critic of Putin’s policies, may finally get his wish. In recent months he has rarely missed an opportunity to criticize the Finance Ministry and Central Bank for keeping interest rates high, a policy he says has fed inflation rather than being a product of rising prices.

But the financial crisis may not be solved quite yet. Economists say any easing of key interest rates would also pave the way for further speculation against the ruble, which banks made a profitable sport of during its three-months of controlled devaluation, as well as renewed capital outflows.

The high interest rates were, in part, intended to make ruble deposits worthwhile for investors who had been rapidly switching to foreign currencies to take advantage of higher post-inflation rates. But now that the central bank is starting to buy back dollars to prevent the ruble from rising too rapidly, critics of the rates say it’s time to start cutting.

One particular concern, analysts and market participants say, is that high interest rates could spell trouble when loans come due this fall. Bad loans are expected to compose a double-digit percentage of credit portfolios this year and are made even more difficult to repay by the high rates that commercial banks are charging.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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