Russia’s central bank is cutting key interest rates, citing reduced stability risk
MOSCOW, RUSSIA: Russia’s central bank has cut its key interest rate by 300 basis points for the third time since rising to the end of February, citing cooling inflation and a rise in the ruble.
KIRILL Kudryavtsev | AFP | Getty pictures
On Thursday, the Russian central bank cut its key interest rate from 1[ads1]4 per cent to 11 per cent, citing a decline in inflation and a rise in the ruble.
Following an extraordinary meeting, decision-makers decided to cut another 300 basis points, the bank’s third since an urgent increase in the key interest rate from 9.5% to 20% in the immediate aftermath of Russia’s invasion of Ukraine, and the imposition of sanctions by Western powers. . At that time, the CBR also introduced strict capital controls in an attempt to curb the impact of sanctions and support the ruble.
“The latest weekly data point to a significant decline in current inflation. Inflationary pressures are easing due to the dynamics of the ruble’s exchange rate and the noticeable decline in inflation expectations for households and companies,” CBR said in a statement on Thursday.
“In April, annual inflation reached 17.8%, but based on the estimate as of May 20, it fell to 17.5%, falling faster than in the Bank of Russia’s April forecast.”
After plunging to a record low of 150 against the US dollar on March 7, weeks after Russian troops began their unique invasion of Ukraine, CBR’s capital controls have brought the currency back to a two-year high, briefly reaching 53 rubles to the dollar on Tuesday.
The ruble weakened against the dollar on Thursday morning to trade at 60.80 against the dollar.
CBR said on Thursday that funds had continued to flow into fixed ruble deposits, while lending activity was still weak, which limits the risk of inflation.
“External conditions for the Russian economy remain challenging, which significantly limits economic activity. The risk to financial stability diminished somewhat, which enabled some capital controls to be relaxed,” CBR added.
The central bank said that future interest rate decisions will meet actual and expected inflation dynamics, in relation to the goal and efforts to transform the Russian economy in the long term, after warning that the economy must undergo a “large-scale structural transformation” to mitigate the effects of sanctions.
This indicated that further rate reductions may be on the cards at upcoming meetings, the next of which will be held on 10 June.
“According to the Bank of Russia’s forecast, given monetary policy, annual inflation will decline to 5.0-7.0% in 2023 and return to 4% in 2024,” the CBR added.
William Jackson, chief economist at Emerging Markets in Capital Economics, indicated in a note Thursday that given that this was the second cut of 300 basis points within a month, CBR is unlikely to continue at this pace.
In particular, the language used in Thursday’s announcement that the CBR “keeps the outlook open” for further interest rate cuts, differed from the planned April meeting where politicians said that the CBR “sees room” for cuts.
“Nevertheless, the key point is that high oil and gas revenues give decision-makers a lifeline, which allows them to calm down economic emergency measures. Against this background, a further easing of capital controls and further interest rate cuts seem likely,” Jackson said. .
