Russia brings policy rate back to pre-war level

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

Maxim Chemetov | Reuters

The Central Bank of Russia on Friday lowered its key rate by 150 basis points to 9.5%, the level at which it was at the start of the Russian invasion of Ukraine.

While acknowledging that the external environment for the Russian economy remains “challenging and significantly restricting economic activity”, the central bank’s board said in a statement that “inflation is slowing faster and the decline in economic activity is of a lesser magnitude” than he predicted in April.

“Recent data suggests that the rates of price growth in May and early June were weak. “a marked decline in inflation expectations of households and businesses,” the CBR said.

This is the fourth rate cut since an emergency hike from 9.5% to 20% in late February, following Russia’s invasion of Ukraine. It was last cut from 14% to 11% at an extraordinary meeting in late May.

Russian inflation slowed to an annual rate of 17.1% in May from 17.83% in April, its highest level since January 2002, indicating that the immediate inflationary shock of the war in Ukraine and international sanctions that resulted may have peaked.

Meanwhile, the ruble survived a fall to historic lows against the dollar after the invasion to become the best-performing fiat currency in the world, although economists are skeptical about the sustainability of the rally.

The currency jumped around 4% against the dollar following Friday’s decision. The ruble was trading at just over 57 to the dollar at midday London time.

The CBR said it would continue to take into account the dynamics of inflation and the “economic transformation process” being implemented in an effort to mitigate the long-term damage from Western sanctions.

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

“Overall, the actual decline in economic activity in the second quarter of 2022 is less pronounced than the Bank of Russia assumed in its April baseline scenario. In view of the above, the Bank of Russia estimates that the fall in GDP in 2022 could be less than the April forecast,” the CBR said.

The bank’s next rate decision meeting is July 22.

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