Russia cuts rate to record low to revive lending

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: Paul Abelsky & Alex Nicholson

Russia’s central bank cut its key interest rates on Tuesday to a record low in the ninth reduction since April as it seeks to deter speculative bets on the rouble and ease credit flows to households and businesses.

Bank Rossii cut the refinancing rate to 9% from 9.5% and reduced the repurchase rate charged on central bank loans to 8% from 8.5%, effective from November 25. It last lowered them by half a percentage point on October 30.

The bank said it cut rates because it hopes “the narrower difference between the levels of domestic and external rates will help stem the rouble’s strengthening.”

Policy makers are trying to revive lending after previous reductions failed to increase credit flows, threatening to stall an export-led recovery that has been fuelled by an 82% surge in Urals crude this year. The bank said last month it will start using interest rate reductions to stem speculative capital inflows and avoid currency volatility.

“Cutting rates by 50 basis points here and there is not going really diminish the appeal of the rouble,” said Manik Narain, an emerging markets strategist at Standard Chartered Bank Plc in London.

“In terms of nominal interest rates Russia is still offering the highest yields in the emerging market space and in an environment where oil prices are remaining relatively well supported we think that the rouble will continue to be seen as an attractive way to position for global recovery,” Narain said.

Rory MacFarquhar and Anna Zadornova, economists at Goldman Sachs Group Inc, expect the rouble will strengthen to 27 per dollar over the next six months as oil prices average $90 a barrel in 2010, they wrote in a note.

Russian equity funds drew record amounts at the end of October, according to EPFR Global. The rouble is the second-best performer among emerging market currencies after the Chilean peso in the past three months, having gained 8.9% in the period, Bloomberg data shows.

Russia, which has the fourth-highest benchmark interest rate in Europe after Ukraine, Iceland and Serbia, is the only member of the four so-called Bric nations still cutting rates. India last lowered its reverse repo and repo rates in April, China reduced its lending rate in December and Brazil hasn’t cut its overnight rate since July.