Russia’s central bank cut interest rates to 14% on Friday, a steeper decline than analysts expected and could announce more by the end of the year if inflation allows.
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The bank cut its policy rate from 17% to 14%, saying that “risks to prices and financial stability have stopped rising and the stage has been set for a rate cut”.
This is the second decline in less than a month. After the central bank had drastically increased its key interest rate to 20% as part of the first sanctions after Russian troops invaded Ukraine at the end of February, it surprisingly lowered it for the first time on April 8th, bringing it down to 17%.
Analysts were expecting the rate cut on Friday but expected a smaller move.
Capital Economics’ Liam Peach predicts the institution will “further ease policy as inflationary pressures ease, to facilitate economic restructuring in the face of sanctions. It is now likely that rates will fall to around 10% by the end of the year,” he wrote in a statement.
“It is clear that the central bank is thinking about how the economy will adjust to a new growth model and that it should not keep interest rates too restrictive” to ease this transition, he adds.
The central bank itself, whose next meeting is scheduled for June 10, sees “room for a key rate cut in 2022 if the situation develops in line with the central forecast”.
For now, “current rates of consumer price inflation, while still elevated, have slowed noticeably after peaking in the first half of March. The deceleration in inflation is largely due to the strengthening of the ruble and the fall in consumption,” the bank noted in its press release.
For all of 2022, annual inflation could reach 23% before slowing next year and returning to the 4% target in 2024, the central bank estimates.
Meanwhile, “the external environment for the Russian economy remains difficult and weighs on economic activity,” she notes, noting that “enterprises face significant difficulties in terms of production and logistics.”
“We are in an area of immense uncertainty,” Central Bank Governor Elvira Nabioullina admitted during a news conference.
Russia’s GDP is expected to fall by 8-10% this year, but according to the bank’s forecasts, it will “grow quickly again in 2023 thanks to a structural transformation of the economy”. However, due to base effects, GDP growth is expected to remain in the range of -3% to 0% in 2023, before an expected increase of 2.5% to 3.5% in 2024.
President Vladimir Putin has repeatedly admitted that the two months of sanctions imposed by the West caused the country significant difficulties, but he also believed that the West’s economic “blitzkrieg” had failed, leaving Russia with an opportunity to rebuild its economy and to diversify, which is heavily dependent on hydrocarbon exports.