Russia cuts the key interest rate to 14 percent, saying inflation could reach 23 percent this year

Russian President Vladimir Putin (V) and Russian central bank governor Elvira Nabiullina

Alexei Nikolsky \ TASS via Getty Images

The Russian central bank has cut the key interest rate to 14% from 17% as it appears to be dampening the impact of international economic sanctions.

In the wake of Russia̵[ads1]7;s invasion of Ukraine and the ensuing unique Western sanctions, the central bank is juggling a sharply shrinking economy and soaring inflation. Economists expect a double-digit contraction for the economy, and inflation of over 20% in 2022.

Russian inflation reached 17.6% as of April 22, and the central bank said on Friday that it expects annual inflation of between 18% and 23% this year, before declining to between 5% and 7% in 2023 and returning to target of 4% in 2024.

The central bank implemented an emergency increase in the key interest rate from 9.5% to 20% in February, days after the invasion of Ukraine, in an attempt to support the ruble’s falling currency.

But with the ruble now back to pre-war levels, politicians are turning their attention to recalibrating the economy in an attempt to absorb the effects of sanctions from international powers.

“The external environment for the Russian economy remains challenging and significantly limits economic activity. With price and financial stability risks no longer rising, conditions have allowed the key policy rate,” the central bank said in a statement on Friday.

“Recent weekly data indicate a decline in current inflation due to a strengthening of the ruble and a cooling of consumer activity.”

The bank said that the inflation outlook is set to be affected by the future of imports and exports, as it appears to be navigating the sharp sanctions, along with future fiscal policy decisions.

It added that it would “take into account the need for a structural transformation of the economy and will ensure a return of inflation to the target in 2024.”

CBR estimates that economic activity began to decline in March, when sanctions began to take effect, with high-frequency data indicating a decline in consumer and business activity.

“The decline in imports due to the introduction of foreign trade and financial restrictions exceeds the decline in exports,” the CBR statement said.

“Despite the gradual change in the country and the product structure for exports and imports as new suppliers and sales markets emerge, companies are experiencing significant problems with production and logistics.”

Although the risk of inflation over the medium term has eased slightly, the CBR added, there are still significant risks associated with any further escalation of foreign trade and economic restrictions that may be imposed on Russia by Western powers.

“The decline in the potential of Russia’s economy driven by restrictions may turn out to be more pronounced than the baseline scenario suggests,” it said.

“Over a short-term horizon, the effect of proinflation factors is likely to be exacerbated by high and unfounded inflation expectations.”

The central bank added that there is room for further relief this year if the inflation risk continues to fall. Governor Elvira Nabiullina has previously stated that the CBR “will not seek to return inflation to target at any cost”, indicating that politicians are willing to accept warmer inflation while focusing on restructuring the economy in the face of sanctions.

“We think it is too early to read into this as a sign that CBR places less emphasis on inflation targets as the center of its political framework, but it is clear that the central bank is thinking about how the economy will adapt to new growth. model and that it should not keep interest rates too restrictive if it hinders this transition, “said Liam Peach, emerging European economist at Capital Economics, adding that further interest rate cuts of 10% by the end of the year now look” likely “.

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