By Anthony Marcus, for Eurasia Business News – June 10, 2022
The central bank of Russia decided today to reduce the key interest rate by 150 basis points (bp), from 11% to 9.5%. This is the level before February 24, when Russian launched its operation and Ukraine.
The Bank of Russia stated that :
“External conditions for the Russian economy remain complex and significantly limit economic activity. At the same time, the slowdown in inflation is happening faster, and the decline in economic activity is on a smaller scale than the Bank of Russia expected in April. The latest data point to low current price growth rates in May and early June. This was facilitated by the dynamics of the ruble exchange rate and the exhaustion of the effects of rush consumer demand in the face of a noticeable decrease in inflation expectations of the population and business.“
The Russian key rate “turned around” in just over three months. Back in March, such a scenario looked completely implausible, but today analysts are not surprised: the market was inclined to the option of a decline of 100 b.p., to 10% (and the Central Bank, according to its Chairman Elvira Nabiullina, seriously considered it), but also allowed 150 b.p.
If we recall the distant beginning of last year, when the rate was at around 4.25%, then there is still plenty of space for the way down. But from now on, this movement is likely to be much more cautious. The Bank of Russia looks at the surprises that have recently sharply slowed down inflation with a degree of suspicion and admits that the picture may change. Therefore, the regulator’s signal, while remaining generally “dovish”, is now less binding: instead of “admitting the possibility of lowering the key rate at the next meetings” – “will assess the feasibility of lowering the key rate at the next meetings”.
In the slightly more distant future, the ship of monetary policy will have to maneuver in the turbulent waters of inflationary risks and the threats of a global recession, targeting a beacon called “structural adjustment of the economy” but avoiding the rocks of stagflation. The temptation to continue a quick rate cut based on the current dynamics of inflation is dangerous, the Central Bank warns, thereby making it clear: the Monetary Policy is gradually moving into the territory of cautious steps and point “adjustment”.
The Bank of Russia will make further decisions on the key rate, taking into account the actual and expected dynamics of inflation relative to the target, the process of structural adjustment of the economy, as well as assessing the risks from internal and external conditions and the reaction of financial markets to them. The Bank of Russia will assess the feasibility of lowering the key rate at the next meetings.
The decisions taken by the Bank of Russia in April-June to reduce the key rate should increase the availability of credit resources in the economy and would limit the scale of the decline in the national economic activity. At the same time, the Russian monetary policy will retain the necessary disinflationary influence to return inflation to the target in 2024. The Bank of Russia forecasts the average key rate in the range of 10.8-11.4% in 2022, 7.0–9.0% in 2023 and 6.0–7.0% in 2024.
Russian annual inflation in April reached 17.8%, however, according to estimates for May 20, slowed to 17.5%, declining faster than the April forecast of the Bank of Russia. As of June 3, annual inflation fell to 17%.
The Russian central bank lowered the inflation forecast in the Russian Federation for 2022 to 14-17% from 18-23%, in 2023 it expects 5-7%, a return to 4% – in 2024.
During an extraordinary meeting on February 28, the Central Bank of the Russian Federation urgently raised the key rate from 9.5% immediately to 20%, in order to support the national currency and the economy against Western monetary sanctions. Three months later, it seems that the Bank of Russia managed to protect the value of the ruble. On May 23, the ruble had gained 2.3% to trade at 61.38 against the euro, approaching its strongest point since June 2015 of 59.02 for one euro, a record also reached on Friday.
The ruble has strengthened by about 30% against the dollar this year despite a large-scale economic crisis in Russia, making it artificially supported by controls imposed in late February to protect russia’s financial sector after tens of thousands of troops were sent to Ukraine. In addition, Russia demands that foreign buyers pay for gas in rubles, which also contributed to the recent ruble rally.
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International reserves of the Russian Federation decreased over the week by 1.1% (or $ 6.4 billion) and as of May 13, 2022 amounted to $ 585.7 billion, the Bank of Russia said in a statement.
The regulator said that reserves decreased as a result of a negative revaluation.
As of May 6, 2022, international reserves were at $592.1 billion.
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On March 1st, the United States issued a directive prohibiting Americans from any transactions with the Bank of Russia, the Russian Federal Ministry of Finance and the Russian National Welfare Fund (NWF). Similar decisions were announced by the UK, Japan, Canada, and Switzerland.
Earlier, on February 28, the European Union approved the decision to freeze the assets of the Central Bank of the Russian Federation. Freezing of international reserves of the Central Bank of the Russian Federation was also included in the sanctions package of Australia.
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