Jan 30, 7:15 AM EST

Russia cuts key rate to help economy, leaving ruble to drop

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MOSCOW (AP) -- In a surprise decision, Russia's central bank on Friday cut its key interest rate, which it had raised sharply last month to support the collapsing ruble, in order to help the fading economy.

The move triggered a drop in the ruble, which was down more than 3 percent at 71 rubles against the dollar in early afternoon trading in Moscow.

The central bank explained its decision to cut the rate from 17 percent to 15 percent by saying that the risks of an economic slowdown are now higher than the risks associated with the ruble's drop. The currency's 50 percent drop since the summer has caused a spike in inflation.

Higher interest rates can help a currency but also hurt economic growth by making loans more expensive.

Analysts said Friday's move was likely due to pressure by government officials and Russian businesses, which are suffering from the high rates.

The central bank said it expected inflation, currently at an annual 13 percent, to peak in the middle of the year and fall below 10 percent next year as the economy adjusts to the weaker ruble.

"Inflation and inflation expectations are expected to decrease," the bank said in a statement.

The central bank had raised its key interest rate to 17 percent in December in a desperate attempt to curb the devaluation of the ruble, which was fueling inflation by raising the price of imports.

Market investors had expected the central bank to hold its interest rates at Friday's policy meeting since it had indicated it would begin to cut rates only when inflation starts declining. That said, the bank has been under pressure domestically to bring rates down to limit damage to economic activity.

"The lobby of bankers and industrialists is growing, with clear (almost aggressive) pressure on the Central Bank of Russia to cut," David Nagle, head of research of Moscow-based Renaissance Capital, said in an emailed note to investors.

Earlier on Friday, a top Russian official accused a leading rating agency of trying to turn tycoons against the Kremlin.

Standard & Poor's this week downgraded Russia's credit rating to a non-investment grade, for the first time in more than a decade.

In remarks in parliament on Friday, Deputy Prime Minister Igor Shuvalov said the goal of the downgrade was to push businesses "to withdraw their support" for the government and President Vladimir Putin.

Russia has exceptionally low levels of public debts level for a country with a "junk" status but the downgrade underlined investors' fears about the unpredictability of Putin's foreign policy and the collapse of the ruble.

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