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Russia has surprised markets by cutting interest rates for the first time in seven months as inflation has come back under control and growth is showing welcome signs of returning in the oil-dominated economy.

Policymakers at the Russian central bank opted to reduce their main rate by 0.25 percentage points to 9.75 per cent – defying market expectations of no change this month.

The Russian economy has been staging a steady recovery from a commodity-induced recession on the back of rebounding global oil prices. Inflation meanwhile has dropped from a peak of 17 per cent to just 4.6 per cent last month – a near five-year low.

In a statement following the decision, rate-setters said the risk they would miss their 4 per cent inflation target this year had “abated” with further rate cuts a “possibility” over the coming quarters.

Inflation has also been tamed by a stunning recovery for the rouble, which hit a 20-month high against the dollar last month. The currency has gained nearly 11 per cent since the election of Donald Trump last November.

Central bank chief Elvira Nabiullina said regulators would lower the key interest rate “gradually, possibly with a few pauses and while retaining a moderately tight monetary policy.”

Ms Nabiullina said lowering rates was a “trend” rather than a “cycle” of regular rate cuts. “We’re going to do it very cautiously and smoothly,” she said, adding the central bank would remain conservative even if hit its inflation target of 4 per cent earlier than the year’s end.

“We don’t just want to get price growth down to 4 per cent once, it’s important to keep inflation around that level in the future,” she said. Ms Nabiullina said regulators would keep the same “moderately tight” policy for a further two or three years.

With GDP growth expected to come in at a still moderate 1-1.5 per cent this year, there is still “significant scope for rate cuts”, said Timothy Ash, at Bluebay Asset Management, who notes Russia has some of the highest real interest rates of the world’s major emerging markets.

“With no prospect for sanctions being removed this year, one might expect the CBR to try and help with the heavy lifting by giving a bump to the economy before the elections [in 2018],” said Mr Ash.

The rouble strengthened to a three-day high against the dollar following the decision.

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