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May 2, 2015

Russia Cut Interest Rate Showing Deeper Economic Cracks

Red Square at Moscow, Russia, Graphic Graphic Source: citywallpagers.com

Russia's central bank cut a crucial interest rate by 1.5 percentage points, bringing the rate down to 12.5 percent. The cut marks the third adjustment for 2015, and the bank will keep cutting rates as consumer prices lower, among other factors.

The government has been urging for rate cuts for the past few weeks, and some officials urge further adjustments to increase economic output. The cut was deeper than analyst predictions, but financial markets anticipated a greater reduction. The central bank may have lowered the rate, but banking officials are concerned about inflation and other aspects of the economy. Russia's economy took a turn for the worst from a variety of factors, such as declining oil prices and western sanctions over the Ukrainian conflict. Further, Russia banned certain imports coming from Europe, causing a spike in food prices and lowering consumer confidence..

Although the rate cut is a surprise to many, the move is considered moderate compared to other officials in Russia who wish to see far deeper cuts. The bank will make additional cuts if inflation retracts from current levels of 16.5 percent. The central bank also cut the rate in the belief that Russia's 13-year inflationary rate has peaked..

Russia Shows Deeper Economic Cracks

Analysts expect Russia's economy to contract by 3.8 percent in 2015, including economies outside of Russia. For instance, experts believe that economies in the Caucasus and Central Asian regions will lower by 3.2 percent in 2015. However, Prime Minister Dmitry Medvedev says that a 1.9 percent contraction in the first quarter is lower than projected, and Russian leaders remain hopeful as the economy struggles. President Vladimir Putin believes the economy will improve in two years or less, and he has urged the Russian people to remain patient. Despite Putin's high approval rating, many Russians are growing dissatisfied with his economic leadership, and critics contend that the government does not have a cohesive plan to fix the economy..

Russia Makes Progress

Despite the setbacks, the economy gains traction in certain areas. For instance, the Russian ruble shot up in value compared to the dollar, but the currency is still prone to fluctuations amid economic turmoil. However, Russian exporters will benefit from a weaker ruble, especially in the area of energy exports. Russia's energy sector benefits from the current rise in oil prices, but experts maintain that prices could fall to unproductive levels as the world market faces an oil glut. Russia's central bank cautions that the economy could shrink by 4.0 percent in 2015 if oil prices hover around $50 a barrel. Outside of energy, private sector investment has increased, and western companies doing business in Russia show no signs of leaving.

Courtesy Economy Watch (Article Archive Here)

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