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Russia’s central bank cut interest rates more than forecast and indicated that borrowing costs may fall even lower, as priorities shift to supporting an economy derailed by international sanctions over the invasion of Ukraine.
Three weeks after reversing part of the emergency hike delivered after the attack, the Bank of Russia lowered its benchmark to 14% from 17%. Most economists surveyed by Bloomberg predicted a decrease to 15%. Policy makers warned the economy may face two straight years of contraction.
Governor Elvira Nabiullina will take questions starting at 3 p.m. in Moscow during her first news conference since the war began in late February. The central bank said in a statement that it sees room for rates to fall further this year if the situation in the economy develops in line with its baseline outlook.
“With price and financial stability risks no longer on the rise, conditions have allowed for the key rate reduction,” it said. “The Bank of Russia’s monetary policy will take into the account the need for a structural transformation of the economy and will ensure a return of inflation to target in 2024.”
As the world’s most-sanctioned nation braces for a deep recession, the Bank of Russia is seizing on a moment when inflation is starting to stabilize and the ruble, sheltered by capital controls, more than recoups losses it suffered after the war. The central bank said on Friday that a stronger currency, alongside weak consumer activity, helped put the brakes on prices.
“The ruble’s exchange rate dynamics will remain a meaningful factor shaping the path of inflation and inflation expectations,” it said. “The external environment for the Russian economy remains challenging and significantly constrains economic activity.”
Policy makers issued new projections on Friday that showed the economy may contract 8% to 10% this year, a sharp revision of their outlook before the invasion. Inflation is set to reach 18%-23% at the end of this year, according to the central bank.
Cheaper borrowing costs will complement a slew of other measures by the Bank of Russia after signaling that it won’t fight inflation “at any cost.” Nabiullina has warned that Russia is entering a period of transformation because sanctions imposed in punishment over the invasion will disrupt supply chains and deprive businesses of many imported components.
What Bloomberg Economics Says…
“With a tight grip on capital markets, the Bank of Russia is an hurry to cushion the impact of sanctions on the economy. Fragile sentiment and high inflation will constrain how much further it can cut, but there’s no use in waiting.”
–Scott Johnson, Russia economist.
Economic distress will become more apparent in the months ahead, setting the stage for one of the deepest downturns in modern Russian history. Despite a slowdown in short-term inflation, price growth on an annual basis will likely top 20% already this quarter.
Still, banks have returned to a liquidity surplus and the ruble has rallied, thanks in large part to higher commodity prices and capital controls. The Russian currency has gained nearly 14% against the dollar this month.
Besides “growing confidence at the central bank that the ruble should remain relatively stable,” the surprise decision is “also a reflection of the bleak outlook the Russian economy faces due to Western sanctions imposed so far, with more measures coming from both the U.S. and the EU,” said Piotr Matys, a senior currency strategist at InTouch Capital Markets Ltd. in London.
The current account surplus that’s been helping to limit the impact of sanctions will be bigger than expected, according to the central bank, reaching $145 billion this year as imports drop more than exports, buoyed by higher energy prices.
Inflation risks “remain substantial,” it said, noting that reducing price growth will depend in large part on Russia’s success in adapting to sanctions and replacing imported products that are no longer available.
“Companies are experiencing significant difficulties in production and logistics” with access cut off to key imported supplies, the central bank said. The shift to new markets for exports and imports will be “gradual,” the central bank said.
(Updates with comments from the central bank, economists starting in fifth paragraph.)
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