Russia lowers interest rate back to pre-war level

The national flag flies over the headquarters of the Russian Central Bank in Moscow, Russia on May 27, 2022.

Maxim Shemetov | Reuters

Russia’s central bank 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 that the external environment for the Russian economy remains “challenging and significantly constrains economic activity”, the central bank’s board said in a statement that “inflation is decelerating faster and the decline in economic activity is of a smaller magnitude” than expected in April.

“Recent data suggests that the rates of price growth in May and early June were low. This is as a result of movements in the ruble exchange rate and a slowdown in the increase in consumer demand against the background of a sharp decline in expectations of household and business inflation,” said the CBR.

Russian inflation slowed to 17.1% a year in May from 17.83% in April, which was its highest level since January 2002, indicating that the immediate inflationary shock of the Ukraine war and the resulting international sanctions may have peaked.

The ruble, meanwhile, has survived a historic drop against the dollar following the invasion to become the world’s best-performing fiat currency, although economists are skeptical about the rally’s sustainability.

The CBR said it will continue to factor in actual and expected inflation dynamics against its target and the “economic transformation process” it is embarking on to mitigate the long-term damage of Western sanctions.

Policymakers now expect annual inflation in Russia to be between 14.0-17.0% in 2022, fall to 5.0-7.0% in 2023 before returning to 4% in 2024.

“Overall, the real decline in economic activity in the second quarter of 2022 is less pronounced than the Bank of Russia assumed in its April baseline scenario. Given the above, the Bank of Russia estimates that the GDP decline in 2022 could be lower than expected in April,” said the CBR.

The bank’s next rate decision meeting will take place on July 22.

Leave a Comment