Russia's Central Bank Makes Surprise Interest Rate Cut

MOSCOW - Russia's central bank cut its main interest rate on Friday in a surprise move aimed at kick starting the economy which is expected to contract sharply under the weight of Western sanctions and plunging oil prices.

The announcement to slash its key interest rate to 15% from 17% marked the first cut since December 2011.

The rate cut had come after the government urged the central bank to help boost the economy, prompting some analysts to accuse the bank of caving in to political pressure.

The ruble tumbled following the announcement, falling to 81 against the euro and 71 against the dollar. A day ago, it was trading at 77.6 to the euro and 68.73 to the dollar.

The bank argued that its action was "aimed at averting the sizeable decline in economic activity against the background of negative external factors," apparently referring to U.S. and EU sanctions as well as sliding crude prices.

On December 15 it jacked up the key rate to 17% from 10.5% in a bid to stabilize the ruble, only to see the currency suffer its worst plunge since President Vladimir Putin came to power 15 years ago, sparking a panic in a country haunted by memories of hyperinflation.

The interest rate was then widely seen as untenably high but the central bank said on Friday that December hike had "resulted in stabilization of inflation and depreciation expectations."

Inflation reached 11.4% in 2014 and could soar to 17% within months, deputy economy minister Alexei Vedev said.

But the central bank said the surge in consumer prices was temporary.

In the longer term, "the inflation pressure will be contained by decrease of economic activity," it said, forecasting inflation to fall below 10% in January 2016.

Copyright Agence France-Presse, 2015