Moving in the opposite direction to much of the rest of the world, Russia’s central bank lowered its interest rate by 1.5 percentage points to 8 percent on Friday, taking it even lower than it was before the country invaded Ukraine.
The bank said that inflation, at 15.9 percent last month, down from about 17 percent in May, was slowing in the country because of “subdued” consumer demand and the strength of the ruble, which reached a seven-year high against the dollar last month. The rate cut was larger than economists expected.
Since Russia’s invasion of Ukraine in February, energy and food prices across the globe have soared as the war has disrupted the export of wheat and other commodities, while nations can no longer be assured of the security of Russia’s supply of natural gas. In response, major central banks have been raising interest rates in increasingly large increments in an effort to tamp down future price increases. On Thursday, the European Central Bank raised rates for the first time in more than a decade.
But in Russia, after a burst of inflation right after the invasion, prices increases have slowed and the economy has not experienced as substantial a decline from Western sanctions as anticipated. The central bank has more than reversed the 10.5-percentage-point rate increase, to 20 percent, that it introduced at the start of the war. In the short term, slowing inflation has created room for the bank to cut rates, but the longer-term outlook for Russia’s economy is dismal.
Although business activity had not slowed as much as the bank expected last month, “the external environment for the Russian economy remains challenging and continues to significantly constrain economic activity,” the central bank said in a statement on Friday. Companies are still struggling with production and logistics amid a sharp decline in imports as sanctions cut Russia off from much of the rest of the world.
The bank forecasts the economy to contract between 4 percent and 6 percent this year, much less than it originally expected right after the start of the war. But the challenges to the economy will come from the supply side, as businesses are constrained by the effect of sanctions and the extent to which they can alter their supply chains and the slow replenishment of stockpiles of finished and raw goods. There is little monetary policy can do to support this.
The bank forecast that inflation would be between 12 percent and 15 percent by the end of the year.
But it said that the path of the economy would be determined by fiscal policy. If the government’s budget was expansionary, monetary policy might need to tighten to keep inflation on a path to returning to the bank’s 4 percent inflation target.
