Russia’s central bank cuts policy rate to 11%, citing lower stability risks

MOSCOW, Russia: Russia’s central bank cut its key rate by 300 basis points for the third time since its emergency hike in late February, citing cooling inflation and a recovering ruble.

KIRILL Kudryavtsev | AFP | Getty Images

The Central Bank of Russia on Thursday lowered its key rate from 14% to 11%, citing a slowdown in inflation and the recovery of the ruble.

Following an extraordinary meeting, policymakers opted for a further cut of 300 basis points, the Bank’s third since an emergency hike in the key rate from 9.5% to 20% in the aftermath of the invasion of Ukraine by Russia and imposition of punitive sanctions by Western powers. At the time, the CBR also imposed strict capital control measures in an effort to soften the impact of the sanctions and support the ruble.

“The latest weekly data points to a significant slowdown in the current rates of price growth. Inflationary pressure is easing thanks to the dynamics of the ruble exchange rate as well as the noticeable decline in inflation expectations of households and businesses “, the CBR said in a statement. Thusday.

“In April, annual inflation reached 17.8%, but, based on the May 20 estimate, it slowed to 17.5%, falling faster than in the Bank’s April forecast. of Russia.”

After plunging to a record low of 150 against the US dollar on March 7, weeks after Russian troops began their unprecedented invasion of Ukraine, CBR capital controls have brought the currency back to a low. two-year high, briefly touching 53 rubles. to the dollar on Tuesday.

The ruble weakened against the greenback on Thursday morning to trade at 60.80 to the dollar.

The CBR said Thursday that funds continued to flow into fixed-term ruble deposits, while lending activity remained weak, limiting inflationary risks.

“External conditions for the Russian economy are still difficult, significantly limiting economic activity. Risks to financial stability have diminished somewhat, allowing for a relaxation of some capital control measures,” the CBR added.

The central bank said future interest rate decisions would take into account actual and expected inflation dynamics, relative to its target and efforts to transform the Russian economy in the long term, after having previously warned that the economy needed to undergo “large-scale structural transformation” to mitigate the impact of the sanctions.

He suggested that further rate cuts could be considered at upcoming meetings, the next of which will be on June 10.

“According to the forecast of the Bank of Russia, taking into account the direction of monetary policy, annual inflation will decrease to 5.0-7.0% in 2023 and will return to 4% in 2024,” the CBR added. .

William Jackson, chief emerging markets economist at Capital Economics, suggested in a note Thursday that given this was the second 300 basis point decline in a month, the CBR is unlikely to continue. at this rate.

Notably, the language used in Thursday’s announcement that the CBR was “leaving open the prospect” of further rate cuts differed from the scheduled April meeting at which policymakers said the CBR “sees strength.” place” for discounts.

“Even then, the key point is that high oil and gas revenues provide policymakers with a lifeline, allowing them to reverse emergency economic measures. Against this backdrop, further relaxation of capital controls and further rate cuts look likely,” Jackson said. .

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