Russia cuts interest rates as ruble rebound offers some relief
In an extraordinary meeting, the Russian Central Bank cut interest rates to 11% from 14% and said more cuts could follow. Interest rates were raised to 20% in the wake of the Russian invasion of Ukraine in February, as the bank tried to prevent Western sanctions causing a financial crisis.
“Inflation pressure is easing against the background of the dynamics of the ruble exchange rate, as well as a marked decrease in inflation expectations for households and companies,” the Russian Central Bank said in a statement. She said she expected inflation to fall to between 5% and 7% this year, down from about 17.5% this month.
Western efforts to reduce Russian energy imports have been slow-moving, and rising oil and gas prices have boosted the Kremlin’s coffers.
“The key point is that higher oil and gas revenues provide policymakers a lifeline, allowing them to roll back emergency economic measures,” William Jackson, chief emerging markets economist at Capital Economics, said in a research note.
“Against this background, further easing in capital controls and additional interest rate cuts seems likely,” he added.
Russian President Vladimir Putin spent years before the war trying to build a “fortress economy,” accumulating reserves that could be deployed in an emergency. On Wednesday, he announced a 10% increase in pensions and the minimum wage to help shield Russians from the impact of inflation.
But the Russian economy is not on a solid foundation. Only capital controls and contingency reserves can last for so long. The new US restrictions mean Russia could soon default on its foreign debt for the first time in more than a century.
Timothy Ash, senior emerging markets analyst at Bluebay Asset Management, said Putin should now deploy those emergency buffers, and that the rate cut was part of a PR campaign.
“They are in an information war with the West, which is the ruble part of that,” he told CNN Business.
A deep recession will come this year. The International Monetary Fund expects Russia’s GDP to shrink by 8.5%, as a result of the harsh sanctions imposed on Moscow.
However, those sanctions still have to strike deep at the heart of Russia’s fossil fuel resources. Moscow is finding it difficult to sell its oil and coal, but its largest energy customer – the European Union – is still unable to agree on an oil embargo and a total ban on imports of Russian natural gas is not even on the table.
Russia is now lowering its forecast for a decline in its oil production this year. Deputy Prime Minister Alexander Novak said that oil production could fall to between 480 million and 500 million tons, a decrease of 6.5 percent by 2021, the Russian Information Agency reported Thursday. The Russian Ministry of Economy had previously forecast a decline of about 9.3 percent this general.
“I think the deflation will be much less,” Novak was quoted as telling reporters during a visit to Iran. “There was only one month of deflation of more than 1 million barrels per day, which is not as deep now. So, I think there will be a recovery in the future,” he added.
While many Western traders and refiners shun Russian oil and coal, India and China have moved to offset some of the slack.
Reuters contributed to this article.