Stock Groups

Russia to slash rates by year-end as rouble recovers -Breaking


© Reuters. FILEPHOTO: Russian 100 rubles banknotes were placed on the desk of a cashier at a grocery store in Tara, Siberia. This was December 14, 2021. Picture taken December 14, 2021. REUTERS/Alexey Malgavko/File Photo

(Reuters) – Russia could see a lower inflation rate this year than expected due to a rebound in the rouble. This should allow the central bank to reduce interest rates during a severe economic crisis.

Russia’s export-dependent economic sector is in recession following the February 24th invasion of Ukraine by Moscow. This move triggered severe Western sanctions, which included a partial freezing of Russia’s reserves.

Record lows were reached when the Russian military intervention in Ukraine caused the ruble to crash. Capital controls helped the rouble to fully recover its losses, and to hold against the euro at levels not seen since early 2020.

An average of 18 analysts polled late April predicted the rouble will trade at 83.50 per dollar in a year, as opposed to the rate forecasted late March by analysts who saw a rate in the range of 97.50. Friday’s official rate was 72.30 Russian roubles to the dollar. [L5N2VY6QY]

The capital controls put in place determine the rouble’s rate. Russia’s large current account surplus is due to Russia’s exports exceeding imports. That suggests the rouble might continue to strengthen, MKB Investments analysts suggested.

This should reduce inflation, which is a major concern for Russians. However, it still has the potential to reach its highest level since 1999. It poses a serious threat to living standards.

According to the poll, 2022 will see inflation rise to 20.5%, up from 8.4% 2021. Late March saw an average of 23.7% inflation predicted by analysts, which is far higher than Russia’s target of 4% and the January poll results, which foresaw 2022’s inflation at 5.5%.

The current unpredictable and volatile environment drives market expectations to change rapidly.

As an emergency measure, the central bank raised its key rate to 20% late February. But it had already reduced it to 17% earlier in April. On Friday, it is likely to reduce rates once again.

According to analysts, this was an indication that central banks will likely consider cutting rates during upcoming meetings. The latest poll indicated that analysts believed it meant the key rate would fall to 10.5% at year-end. One month ago, this rate had been at 16%.

According to the poll, lower interest rates will make borrowing more affordable. This is critical for an economy which is expected to shrink 8.4% in 2018. Similar polls in the early 2022 forecasted 2.5% economic growth.

Russian economic ministry is more cautious as it projects a 12.4% contraction under its conservative scenario. This will represent the greatest decline in gross national product since 1994.