Russia’s central bank cuts key interest citing lower stability risks

Russia’s Central Bank on Thursday cut its key interest rate from 14% to 11%, citing slowing inflation and a recovery in the ruble.

After an extraordinary meeting, policymakers opted for an additional 300 basis points cut, the bank’s third cut since an emergency hike in its key rate from 9.5% to 20% in the wake of Russia’s invasion of Ukraine, and the imposition of punitive sanctions by Western powers. . At the time, the Central Bank of Jordan also imposed strict capital control measures in an effort to mitigate the impact of sanctions and prop up the ruble.

“The latest weekly data indicate a significant slowdown in the current price growth rates. Inflation pressure is easing against the background of the dynamics of the ruble exchange rate, as well as a marked decrease in the inflation expectations of households and companies,” the central bank said in a statement. Thursday.

“In April, annual inflation was 17.8%, however, based on estimates up to May 20, it slowed to 17.5%, declining faster than the Bank of Russia forecast for April.”

Having plunged to a record low of 150 against the US dollar on March 7, weeks after Russian forces began their unprecedented invasion of Ukraine, the CBR’s capital control measures sent the currency back to a two-year high, briefly touching 53 rubles. against the dollar on Tuesday.

The ruble weakened against the US dollar on Thursday morning, trading at 60.80 per dollar.

On Thursday, the Central Bank of Canada said that money continued to flow into term deposits of the ruble, while lending activity remained weak, limiting inflation risks.

“External conditions of the Russian economy remain difficult, which significantly restricts economic activity. Financial stability risks have somewhat decreased, which has made it possible to ease some capital control measures,” CBR added.

The central bank said that future interest rate decisions will accommodate actual and projected inflation dynamics, relative to its goal and efforts to transform the Russian economy in the long term, having previously warned that the economy must undergo a “large-scale structural transformation” to mitigate it. The effect of sanctions.

He suggested that more rate cuts will be on the cards at upcoming meetings, the next of which will take place on June 10.

“According to the forecasts of the Bank of Russia, given the position of monetary policy, annual inflation will fall to 5.0-7.0% in 2023 and return to 4% in 2024,” the Central Bank added.

William Jackson, chief emerging markets economist at Capital Economics, suggested in a note Thursday that given that this is a 300 basis point cut within a month, CBR is unlikely to continue at this pace.

Notably, the language used in Thursday’s announcement, that the Bank of Canada “holds open prospects” for further rate cuts, differs from the scheduled April meeting in which policy makers said the BoC “sees scope” for cuts.

“The key point, though, is that higher oil and gas revenues provide policy makers with a lifeline, allowing them to roll back emergency economic measures. Against this backdrop, further easing in capital controls and additional interest rate cuts seem to be warranted,” Jackson said. Possible”. .