Russia cuts key interest rate back to prewar level
The Russian Central Bank Headquarters in Moscow is covered by the national flag.
Maxim Shemetov | Reuters
The Central Bank of Russia on Friday cut its key interest rate by 150 basis points to 9.5% — the level it was at when Russia’s invasion of Ukraine began.
While acknowledging the fact that Russia’s external environment is still “challenging” and severely restrains economic activities, the board of the central bank stated in a statement that inflation is “slowing faster and the decrease in economic activity are smaller than they expected.”
Recent data suggests that the price growth rates for May and June were low. As a result, this is a consequence of ruble“Exchange rate movements and the slowing down of consumer demand are in line with a sharp decline in inflation expectations by households and businesses,” CBR reported.
Russian inflation fell to 17.1% annually in May, from 17.83% in April. This was the lowest level of inflation since January 2002. It may be that the inflationary shocks resulting from war in Ukraine or the resulting international sanctions have reached their peak.
The ruble, however, managed to survive a dramatic plunge against the dollar after the invasion and remained the best performing fiat currency in the world. economists are skeptical about the sustainability of the rally.
CBR stated that it would continue to consider actual and anticipated inflation dynamics in relation to its target, and “economic transformation process”, which it is undertaking to reduce the damage caused by Western sanctions.
Policymakers now expect annual inflation in Russia to come in between 14.0–17.0% in 2022, fall to 5.0–7.0% in 2023 before returning to 4% in 2024.
The Bank of Russia believes that the real decline in economic activity for 2022 Q2 will be less than it had assumed under its April baseline scenario. According to the CBR, the Bank of Russia estimated that the decline in 2022 GDP may be less than what was predicted for April.
Next rate meeting of the bank is scheduled for July 22.