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Russia cuts key interest rate first time in 10 months

Xinhua, June 10, 2016 Adjust font size:

The Russian Central Bank on Friday lowered its key interest rate by 0.5 percent to 10.5 percent in a first rate cut since August 2015, citing stable inflation and imminent economic recovery.

The bank said in a statement that it would consider the possibility of a further rate cut based on "estimates for inflation risks and the alignment of inflation decline with the forecast trajectory."

The bank noted that Russia's annual inflation stabilized at 7.3 percent in April, while monthly inflation in seasonally adjusted terms was about 5 percent, particularly due to a more favorable than expected global commodity markets.

The improved economic situation allowed the bank to cut its inflation forecast for the end of 2016, to 5-6 percent, the statement added.

Taking into account the decision just made and the retention of a moderately tight monetary policy, the bank said, slowing inflation allows more certain reliance on sustainable inflation reduction to less than 5 percent in May 2017 and the 4 percent target in late 2017.

It said the Gross Domestic Product (GDP) dynamics in the first quarter of 2016 and macroeconomic indicators for April confirmed greater sustainability of the Russian economy to oil price fluctuations.

Meanwhile, import substitution and non-commodity exports continued to expand, and additional growth areas in manufacturing were taking shape.

Russia's GDP declined by 1.2 percent year-on-year in the first quarter of 2016, and 0.7 percent in April, according to the Russian Federal Statistics Service.

The country's GDP shrunk by 3.7 percent in 2015, mainly due to slumping oil prices, Russia's main export commodity, as well as Western sanctions imposed to punish Moscow for its role in the Ukraine crisis.

The Central Bank said that investments continued to show a downward trend and a wide range of industries have been experiencing stagnation, including those that have traditionally been the sources of growth for the Russian economy.

However, it added that positive shifts in the economy anticipate the beginning of its growth recovery.

The bank forecasts that quarterly GDP would start to rise in no later than the second half of 2016 to reach an increase of 1.3 percent in 2017.

Its forecast is based on a fairly conservative estimate of the annual average oil price of approximately 40 U.S. dollars per barrel in the next three years, the bank said.

The bank warned that volatility in the global commodity and financial markets might also have a negative impact on the exchange rate and might cause a slowdown in the inflation reduction. Endi