By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News, July 26, 2022

The Board of Directors of the Bank of Russia on July 22 decided to reduce the key rate by 150 basis points (bp), to 8% per annum, reported a press release.

The 150 bps rate cut came as a surprise to many analysts. Experts expected a rate cut of 50 b.p. – up to 9% per annum. Only some economists did not rule out greater steps to reduce – by 75 bps (to 8.75%) or by 100 bps (to 8.5%).

The current growth rate of consumer prices remains low, contributing to a further slowdown in annual inflation. In June, annual inflation fell to 15.9% (after 17.1% in May) and, according to estimates as of July 15, decreased to 15.5%. […] This is due to both the influence of a set of one-time factors and the restrained dynamics of consumer demand. Inflation expectations of the population and business have noticeably decreased, reaching the levels of spring 2021. The decline in business activity is slower than the Bank of Russia expected in June. However, external conditions for the Russian economy remain difficult and still significantly limit economic activity,” said the Russian central bank in its statement.

The Bank of Russia intends to 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 Russian central bank will assess the feasibility of lowering the key rate in the second half of 2022. “According to the forecast of the Bank of Russia, taking into account the ongoing monetary policy, annual inflation will decrease to 12.0-15.0% in 2022, 5.0-7.0% in 2023 and will return to 4% in 2024“, stated the regulator in the press release.

In the baseline scenario, taking into account the current situation in the economy, the Bank of Russia forecasts a decline in GDP in 2022 by 4.0–6.0%. In 2023, the GDP growth rate will remain negative and will be (-4.0) -(-1.0)%, reflecting the base effect of the first quarter of 2022 and a more stretched decline in output. In 2024, GDP growth is projected in the range of 1.5-2.5%.

The next meeting of the Board of Directors of the Central Bank of the Russian Federation, which will consider the issue of the key rate, is scheduled for September 16.

The Board of Directors of the Bank of Russia had reduced the key rate by 150 basis points (b.p.), to 9.5% per annum, at a meeting on June 10. This decision was preceded by three rate cuts of 300 b.p. (May 26 – up to 11%, April 29 – up to 14%, April 8 – up to 17%). The Bank of Russia sharply raised the rate – from 9.5% to 20% – on February 28 in response to the growth of devaluation and inflation risks. In March, he kept it at 20%.

Decreasing the key interest rate means easing the monetary policy, increasing the flow of liquidity into the economy. Central banks do that when they are confident that inflation is under control and when the economy needs more money to work.

International reserves of the Russian Federation amounted to US $ 565.3 billion as of July 15, down by US$ 7.4 billion, or 1.3%, over the week due to negative revaluation, reported the Bank of Russia on July 21.

As of May 6, 2022, international reserves were at $592.1 billion.

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© Copyright 2022 – Swann Collins, investor, writer and consultant in international affairs.