Russia cuts key interest rate to 14%, says inflation could reach 23% this year

Russian President Vladimir Putin (left) and Central Bank Governor Elvira Nabiullina

Alexey Nikolsky/TASS via Getty Images

The Russian Central Bank It lowered its key interest rate to 14% from 17% as it seeks to mitigate the impact of international economic sanctions.

In the wake of the Russian invasion of Ukraine and the subsequent unprecedented Western sanctions, The central bank is dealing with a sharply contracting economy and rising inflation. Economists predict a double-digit contraction of the economy, and inflation over 20% in 2022.

Russian inflation was 17.6% as of April 22, and the central bank said on Friday it expects annual inflation of 18%-23% this year, before slowing to between 5% and 7% in 2023 and returning to its target of 4% in 2024. .

The The central bank implemented an emergency increase From the key rate from 9.5% to 20% in February, days after the invasion of Ukraine, in an attempt to prop up its declining ruble currency.

However, with the ruble now returning to pre-war levels, policymakers are turning their attention to resetting the economy in an effort to absorb the impact of punitive sanctions from international powers.

“The external environment of the Russian economy remains challenging and significantly restricts economic activity. With price and financial stability risks not continuing to rise, conditions have allowed for a cut in the key interest rate,” the central bank said in a statement on Friday.

“The latest weekly data indicates a slowdown in the current price growth rates on the back of the strengthening ruble and slowing consumer activity.”

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The bank said its inflation outlook will be affected by the future of its imports and exports, as it looks to bypass severe penalties, along with future fiscal policy decisions.

It added that it “will take into account the need for a structural transformation of the economy and will ensure that inflation returns to the target level in 2024.”

CBR estimates that economic activity began to decline in March, as sanctions took effect, with high-frequency data indicating a decline in consumer and business activity.

The central bank statement said: “The decline in imports due to the imposition of restrictions on foreign and financial trade outweighs the decline in exports.”

“Despite the gradual change in the country and the structure of goods from exports and imports with the emergence of new suppliers and sales markets, companies are facing great difficulties in production and logistics.”

The central bank added that although inflation risks in the medium term are slightly reduced, there are still significant risks associated with any further escalation of foreign trade and financial restrictions that Western powers may impose on Russia.

“The decline in the potential of the Russian economy due to the restrictions may be more pronounced than the baseline scenario assumes,” she said.

“In the short term, the influence of pro-inflationary factors is likely to be amplified by elevated and unconstrained inflation expectations.”

The central bank added that there is scope for further easing this year if inflation risks continue to decline. Governor Elvira Nabiullina previously stated that the Central Bank of Canada “will not seek to bring inflation back to target at any cost,” noting that policy makers are willing to accept higher inflation while focusing on restructuring the economy in the face of sanctions.

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“We think it is too early to read this as an indication that the CBJ is placing less emphasis on inflation targeting as the center of its policy framework, but it is clear that the central bank is thinking about how the economy will adjust to the new growth,” said Liam Beach, Emerging Europe Economist at Capital Economics, Further rate cuts of about 10% by the end of the year now appear “likely”.

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