By Alex Nicholson and Paul Abelsky Dec. 25 (Bloomberg) -- Russia’s central bank cut its benchmark interest rate for the 10th time since April to discourage speculative ruble trades and ease credit flows. Bank Rossii cut the refinancing rate by a quarter-point to a record low 8.75 percent and lowered the repurchase rate charged on one- and seven-day central bank loans to 7.75 percent from 8 percent effective Dec. 28, it said in a statement today. The bank last lowered the rates by half a percentage point on Nov. 24. The decision to cut rates may “soften the impact of factors constraining the economic rebound and will make the tendency toward GDP growth more sustainable,” Bank Rossii said. With bank liquidity rising, the cuts may limit the inflow of short-term foreign capital that could lead to volatility on the ruble market, according to the statement. The central bank has cut the refinancing rate from 13 percent in April after the world’s biggest energy exporter lurched into its deepest economic decline since the government began regularly updating economic data in 1995, contracting 10.9 percent in the second quarter and 8.9 percent in the third. The bank has eased policy to aid the recovery and stem speculative inflows that have fueled ruble volatility. Equity Funds There’s some evidence the Moscow-based bank’s currency policy is working. The ruble has lost 2.7 percent against the dollar since Nov. 11, when it reached the strongest level of the year, after gaining 13 percent in the previous three months. Bank Rossii’s efforts to deter speculation are “appropriate,” International Monetary Fund senior Russia representative Odd Per Brekk said last month. Russian authorities are trying to discourage the use of the ruble in so-called carry trades, in which investors borrow in low-yielding currencies to buy high-yielding currencies that can generate a quick profit. Russian equity funds drew $59.5 million in the seven days ended Dec. 16 after posting an inflow of $181.7 million a week earlier, according to EPFR Global. The country may post a net capital outflow in the fourth quarter after oil prices retreated in December and investors fled emerging-market assets on concerns about Dubai’s debt restructuring, central bank Chairman Sergey Ignatiev said on Dec. 22. Russia may see a net outflow of $40 billion for the year, according to the central bank. ‘Zero Growth’ Policy makers are also trying to revive lending after previous rate cuts failed to ease credit flows. The financial industry will show “zero growth” next year as provisions for mounting bad loans tie up cash that might have gone to companies and households, Alexander Turbanov, head of the Deposit Insurance Agency, said last week. “We could not drastically change the situation with lending in industry,” Deputy Economy Minister Andrei Klepach said last month. “There is stagnation in lending and borrowing.” Policy makers will be looking for signs that today’s cut feeds through to bank loans. Lending to companies by Russian banks rose 0.8 percent last month, Bank Rossii First Deputy Chairman Gennady Melikyan said last week. Lending to households fell 0.2 percent in the month, while bank assets grew 2.8 percent, Melikyan said, adding that the data don’t include OAO Sberbank, the country’s biggest lender, or take exchange-rate shifts into account. ‘Frozen’ Loan Books “Banks are not lending at present, and have effectively frozen their corporate loan books,” said Clemens Grafe, chief economist at UBS AG in Moscow. “Instead, they are concentrating on building up buffers to absorb expected loan losses, and this is clearly restricting the economy.” Russian banks’ corporate loan books fell 0.5 percent in October, following a 0.7 percent decline the previous month, the central bank said on Dec. 3. Corporate borrowing costs from domestic banks fell in November to the lowest level this year, sliding to an average of 13.6 percent compared with 13.9 percent a month earlier and 17.4 percent in January, the central bank said on Dec. 23. The country will post “steady economic growth” next year because the negative factors that led to the worst slump since the 1998 default, including lower prices for commodities and a lack of external financing, are “no longer in effect,” Ignatiev said this week. Further Cuts The economy may grow 5 percent or more in 2010, faster than the government is estimating, and output will return to its pre- crisis level in less than three years, Ignatiev said Dec. 22. The refinancing rate may be lowered as much as 1 percentage point in 2010, Arkady Dvorkovich, President Dmitry Medvedev’s chief economic adviser, said Dec. 8, adding that the inflation rate next year may slow to 8 percent or more. “Average lending rates may drop more,” Dvorkovich said. “Lending rates for large and medium companies are at 14 percent to 16 percent. I think they may drop by 3 percentage points.” Russia has continued easing its policy rates even as the IMF has urged Bank Rossii to halt the reductions, warning they may be inflationary. “Further cuts in policy interest rates should be put on hold until the monetary implications of the very large end-year liquidity injection associated with the fiscal deficit become clear,” the IMF said in a report this month. The IMF warned Bank Rossii to step up efforts to contain inflation and embrace a more “ambitious” policy to reduce consumer-price growth to below 5 percent in 2010. Consumer prices rose 9.1 percent on an annual basis in November, the slowest pace in more than two years, according to the Federal Statistics Service. The ruble gained for a third day against the dollar, adding 0.4 percent to 29.4683 at 11:57 a.m. in Moscow, heading for its strongest close since Dec. 4. Against the euro the Russian currency was little changed at 42.5934. To contact the reporters on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net; Paul Abelsky in Moscow at pabelsky@bloomberg.net

Source