bne IntelliNews -

The Central Bank of Russia (CBR) on March 13 made a 1% cut in the main lending rate to 14% in line with expectations.

The move shows the authorities are more concerned about the declining economy than recent sharp inflation, which the CBR blamed on ruble depreciation and external trade restrictions under western sanctions: “Their impact is short-term and will be exhausted before the end of 2015," the bank said of these factors after the rate cut.

"An attempt to lower inflation at any cost would be a short-sighted strategy," CBR Bank Governor Elvira Nabiullina told media. The bank expected inflation to run at 12-14% at the close of the year, and "closer to 12%", Nabiullina added.

The CBR’s decision is in line with most experts’ forecasts, although some had said it needed to keep the interest rate at the same level to cap inflation. As of March 10, the annual consumer price growth rate stood at 16.7%, the highest level for 13 years.

Others had argued that a 2% cut was necessary to normalise the interest rate situation and revive the financial sector. 

"The balance of risks is still shifted towards a more significant cooling of the economy," the central bank said in statement after it announced the cut.

Its decision was supported by CPI data on slowing inflation growth. Inflation for March 3-10 was 0.2% week-on-week, which indicates a material deceleration in price growth vs the 0.9% reported for February 1-9, Alfa Bank commented before the rate cut was announced.

"This renders our expectations of inflation peaking at 18% y/y this month and market expectations of inflation reaching 20% y/y in the coming months too pessimistic," Alfa Bank economist Dmitry Dolgin said in a note.

However, "the too sharp deceleration in weekly inflation from 0.6-0.9% w/w in the previous two months to 0.2% w/w in the last two weeks raises questions whether this reflects a sharp deterioration in demand or represents a temporary reaction to the recent move by retailers to freeze prices on the socially sensitive food products," Dolgin added.

February macro statistics, which will be released next week, are expected to bring more clarity on the matter.

After the rate was cut, the ruble stood at 60.92 against the dollar, up around 0.4% on the day, having been down around 0.5% before the rate decrease.

The bank’s previous surprise 2% cut in January led to the ruble falling and crossing the RUB71 mark to the dollar, its weakest value for six weeks. The CBR’s next meeting is due on April 30. 

The rate cut will be especially welcomed by Russia's second-largest bank, state-run VTB, which had previously indicated that it would sustain heavy losses, its first since the 2009 meltdown, if the official interest rates were not cut.