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Russian central bank slashes key rate, sees room to cut further

russia central bank

Russia’s central bank lowered its key interest rate to 11 per cent on Friday and said it saw room for more cuts this year, as inflation slows from more than 20-year highs and the economy is about to contract.

It announced the move at an extraordinary meeting after cutting the key rate to 14 per cent in April, weeks after an emergency rate increase to 20 per cent triggered by Russia’s move to send tens of thousands of troops into Ukraine on Feb. 24.

The central bank, which has now slashed its key rate by a cumulative 900 basis points since February, said it “holds open the prospect of a key rate reduction at its upcoming meetings.”

“Inflationary pressure eases on the back of the rouble exchange rate dynamics as well as the noticeable decline in inflation expectations of households and businesses,” the bank said in a statement in English.

The rouble has become the world’s best-performing currency this year, buoyed by capital controls that Russia imposed in late February to cap financial stability risks and defend itself against sweeping western sanctions.

The central bank said external conditions for the Russian economy are still challenging but financial stability risks have somewhat decreased, opening room for easing of some capital control measures.

The rouble’s performance has “given policymakers room to reverse emergency measures introduced since February,” Capital Economics analysts said in a note.

“We suspect that the CBR won’t continue this pace of easing… A further easing of capital controls and additional rate cuts seem likely,” they said.

The rouble showed limited reaction to the central bank’s move, extending intraday losses and sliding to 60.90 against the dollar, down 2.7 per cent on the day.

The central bank could cut its key rate further by 50-100 basis points at the next rate-setting meeting scheduled for June 10, said Dmitry Polevoy, head of investment at LockoInvest firm.

Governor Elvira Nabiullina is due to speak at a banking conference in Moscow later in the day where she may shed more light on her bank’s plans.

The central bank did not mention its 2022 inflation forecast, which previously stood at 18-23 per cent, but said inflation will slow to 5-7 per cent in 2023 before reaching its 4 per cent target in 2024.

Inflation slowed to 17.51 per cent as of May 20 from 17.69 per cent a week earlier amid a decline in consumer activity, the economy ministry said, but hovered near its highest since early 2002.

High inflation dents living standards and has been one of the key concerns among Russians for years.

On Wednesday, President Vladimir Putin ordered 10 per cent rises in pensions and the minimum wage to cushion Russians from inflation.

He denied the country’s economic problems were all linked to what he calls its “special military operation” in Ukraine, which has prompted the West to impose unprecedented sanctions against Russian banks, companies, business leaders and figures close to the Kremlin.

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