Russia Monetary Policy April 2020

Russia: Central Bank cuts key policy rate to over six-year low amid looming recession

At its 24 April meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) slashed the key interest rate by 50 basis points to at an over six-year low of 5.50%. The decision, which marked a return to the monetary easing cycle after a brief pause in March and was in line with market expectations, was predominantly driven by a rapidly worsening economic backdrop due to the Covid-19 pandemic.

The Bank noted that the economic panorama deteriorated severely at the outset of Q2, prompting its shift to a more accommodative monetary policy. Collapsing oil prices and evaporating foreign demand due to the Covid-19 pandemic hammered the external sector, while government-imposed restrictions began to considerably hinder domestic economic activity in April. Moreover, global financial markets stabilized somewhat over the past weeks, which, coupled with a more stable ruble, further supported the decision. With regards to prices, according to the CBR, the economic fallout from Covid-19 “creates material and prolonged disinflationary influence on price dynamics from the aggregate demand perspective, which offsets the effect of temporary pro-inflationary factors, including those related to the fall in oil prices”.

In its accompanying statement, the Bank struck a dovish tone, hinting at further monetary policy easing ahead. The CBR’s changed rhetoric points to its focus on the grim economic outlook, with inflation objectives seemingly pushed to the backburner in the short term. The Bank expects GDP to shrink by 4.0–6.0% in 2020, before rebounding and growing 2.8–4.8% in 2021, noting that the “recovery will in large measure depend on the amount and efficiency of the Government and Bank of Russia’s measures aimed at mitigating the fallout from the coronavirus pandemic”.

Commenting on the monetary policy outlook, Ariel Chernyy, an economist at UniCredit, said:

“Given the CBR’s dovish turn, we expect another 100bp of cuts this year, starting at the June meeting, bringing the rate to 4.50% by year-end if RUB volatility remains contained. The key risk to our outlook is the oil price: a further decline in the coming months, driven by weak demand and lack of storage capacity, could lead to more-pronounced ruble depreciation, creating inflationary pressure and making the CBR pause rate cuts. However, the FX pass-through is likely to be dampened by depreciation coinciding with a large demand shock. As a result, inflation is unlikely to deviate much from target and we expect it to return below 4% next year.”

The next monetary policy meeting is scheduled for 19 June.

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