Ruble’s success against western sanctions prompts Russia’s interest rate reduction to 14%

The Central Bank of Russia has lowered its benchmark interest rate to 14% from 17%, citing recent weekly data that shows current price growth rates are slowing due to the strengthening of the ruble and cooling of consumer activity.

This is according to a Russian Central Bank’s press release titled “The Bank of Russia cuts the key rate by 300 b.p. to 14.00% p.a.”

Despite fierce opposition in the form of the strongest economic sanctions ever imposed on a country, the Russian currency, the ruble, looks to be strengthening. The ruble was trading at 70 rubles per dollar at the time of writing, down from 81 rubles per dollar on February 24, the first day of the invasion.

According to the Bank of Russia’s baseline forecast, GDP will reduce by 8.0–10.0% in 2022. The decrease will be mainly driven by supply-side factors. In 2023, the Russian economy will begin growing gradually amid a structural transformation

What the Russian Central Bank is saying

The report partly reads ”the Bank of Russia Board of Directors decided to cut the key rate by 300 basis points to 14.00% per annum.”

The Bank justified the reduction in rate to the strength of the rubles and reduction in financial stability risks. The Banks said “With price and financial stability risks no longer on the rise, conditions have allowed for the key rate reduction. Recent weekly data indicate a slowdown in current price growth rates on the back of a strengthening of the ruble and a cooling of consumer activity.”

The bank also stated that given the monetary policy stance, “annual inflation will reach 18.0–23.0% in 2022, slowing down to 5.0–7.0% in 2023 and returning to 4% in 2024.”

The Banks also stated that the rate reduction is inline with current preferential lending programmes of the Government will support the availability of credit resources in the economy and limit the scale of decline in economic activity. However, the disinflationary impact of monetary policy will remain in place.

What you should know

  • The Central Bank is managing a rapidly declining economy and surging inflation in the aftermath of Russia’s invasion of Ukraine and the harsh Western sanctions that followed.
  • In February, days after the invasion of Ukraine, the central bank raised the key rate from 9.5% to 20% in an emergency move to stabilize the plummeting ruble currency.
  • This sharp tightening in monetary conditions has given way to their softening in several segments of the financial market
  • Hence, the Russian Central Bank announced a reduction in the main rate from 20% to 17%. Today, the banks announced a further reduction in interest rate to 14% showing the government’s willingness to mitigate the growth decline caused by heavy sanctions.
  • Russian inflation reached 16.7% in March and the central bank said on Friday that it expects annual inflation of between 18% and 23% this year. This is a far cry from the target inflation of 4% on the Russian website however, the government has promised to return to the inflation target of 4% in 2024.

Source link

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button