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Putin’s “Jawboning” Chews Away at Central Bank Independence

Anytime that the Prime Minister gets this involved in the day-to-day management of the economy, bad things are bound to happen.  The Financial Times is carrying an article about a significant rate cut that Putin personally forced upon the market – the result was a cut in the key lending rates by the Central Bank of 50 base points, with refinancing dropping to12.5% and the minimum one-day repo rate to 9.5%

The bank said the cut was a response to lower inflation, but analysts blamed “jawboning” by Mr Putin. Its action came a day after Mr Putin met business leaders and called for lower lending rates. “There must be a higher comfort level for commercial banks, so that providing guarantees actually lowers the credit risks and, I would hope, loan interest rates,” he said.

Rory MacFarquhar, an analyst for Goldman Sachs in Moscow, called the rate decision “an unfortunate episode dispelling any semblance of central bank independence”.

In the past the central bank had resisted pressure from Mr Putin on exchange rate policy, “but rarely has the jawboning been quite as direct as [on Wednesday]”, he said in a research note. (…)

“We think the rate cut is less a response to lower inflation . . . and more to the very poor March output data that suggest this year’s GDP decline will be considerably steeper than previously expected,” Mr MacFarquhar said.

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