Russia’s central bank has cut interest rates in a surprise move that it said was in response to a slowdown in inflation and an improved GDP forecast.
The decision to cut rates to 8 per cent on Friday, from 9.5 per cent in June, suggests that the central bank believes Russia is weathering the storm of western sanctions imposed over its invasion of Ukraine better than it had feared.
The central bank lifted rates to 20 per cent after Moscow’s decision to go to war in late February, as the state lender sought to stabilise the rouble. Since then it has gradually unwound the increase, with rates now below where they were just before the invasion.
But the latest cut was significantly sharper than expected and contrasts with the recent large rate increases in the eurozone and US.
“A cut of 150 basis points is a big surprise to both us and the market,” Sofya Donets, Russia economist at Renaissance Capital, wrote in a note to clients.
“It was an unexpected decision for the market,” said Yuri Popov, interest rate strategist at SberCIB, the investment branch of Russian state lender Sberbank. Analysts had anticipated a decrease of 50 basis points, he said.
Donets said two factors were behind the rate cut: current inflation dynamics and inflation expectations.
“We may see a second month of deflation in July, while August-September are traditionally favourable months for price dynamics. This is reflected in a significant revision to the 2022 inflation forecast by the regulator,” she wrote.
The Russian central bank said inflation had fallen from 17.1 per cent in May to 15.9 per cent in June. It expected annual inflation to fall to between 12 and 15 per cent by the end of this year. In late April, it had predicted annual inflation of between 18 and 23 per cent in 2022.
“We still believe the main reason for the decline in inflation is the price correction after the spike in March,” central bank governor Elvira Nabiullina said at a press conference after the rate decision was announced. “Now the situation has changed. The rouble has significantly strengthened.”
The rouble slipped below 58 to the US dollar after the central bank announced the rate cut. In the fortnight after the invasion, the currency lost almost half its value, reaching 150 to the dollar. It has been rising steadily since, aided by stringent capital controls.
The central bank said it would consider further rate cuts later in the year. Its next meeting is set for September 16.
The decision was partly motivated by the risk of the rouble weakening in the event of a global recession or “a strengthening of external trade and financial restrictions, which would have a pro-inflationary effect”, Popov wrote in a note.
It was also driven by an updated assessment of the health of the country’s economy. Although the outlook for the Russian economy remains poor, the central bank’s expectations have been revised higher.
This picture contrasts with the gloom in the global economy, with China struggling to bounce back from Covid-19 lockdowns, financial markets increasingly expecting a US recession and European economies hit by high gas prices.
“Incoming data indicate that the economic downturn will be more protracted in time and perhaps less deep,” said Nabiullina, referring to the hit Russia has taken as a result of the Ukraine invasion.
The Russian central bank said in its statement announcing the rate decision that the decline in business activity had been slower than it had forecast in its June statement.
Russian companies were still facing challenges as sanctions and embargoes hit supply chains, it said. But business sentiment was “gradually improving” as businesses found new suppliers and markets.
“The decline in GDP is projected to be smaller, largely due to a more moderate reduction in exports. This is primarily due to the redistribution of oil exports to new markets,” said Nabiullina.
As a result, the central bank said it was changing its forecast for Russia’s GDP this year and now expected a decline of between 4 and 6 per cent, driven by supply-side factors. In April, the bank predicted a GDP drop of between 8 and 10 per cent for 2022. It expects a return to growth by 2024.
However, restrictions on the withdrawal of foreign currency — introduced immediately after Russia’s invasion of Ukraine — would be extended when they come up for review in September, said Nabiullina.
