Russia Monetary Policy April 2022

Russia: Central Bank cuts rate by further 300 basis points to 14.00% at the end of April

At its monetary policy meeting on 29 April, the Central Bank of the Russian Federation (CBR) slashed its key interest rate by 300 basis points to 14.00%. The move took most market analysts by surprise, and came on the heels of another unexpected 300 basis point rate cut on 8 April. Monetary policy easing in recent weeks reflects the Bank’s efforts to boost shrinking economic activity, after the country’s financial system mostly withstood the initial shock posed by sanctions.

The Bank’s decision was driven by a change in macroeconomic and financial conditions. After sliding to an all-time low in the wake of the country’s invasion of Ukraine, the ruble recovered its previous losses against the U.S. dollar through early May. Moreover, the Bank’s draconian measures largely succeeded in fending off a collapse of the country’s financial system and pulled the brakes on spiraling inflation. Although having avoided the worst possible scenarios, Russia has been set on the path towards a recession by the unprecedented sanctions unleashed by the international community. Taken together, largely contained price and financial stability risks allowed the CBR to aggressively cut rates in order to support the shrinking economy, although its monetary policy stance remains contractionary.

Moving forward, the Bank sees scope for further rate cuts by the end of this year. That said, the outlook is highly uncertain and volatile, with the CBR now forecasting annual inflation to reach 18.0–23.0% in 2022, before slowing to 5.0–7.0% in 2023 and returning to its target rate of 4.0% in 2024. Meanwhile, the Bank expects GDP to shrink 8.0–10.0% in 2022 and a further 3.0% in 2023, before rebounding in 2024. Overall, the Bank’s monetary policy will “take into the account the need for a structural transformation of the economy” and “risks posed by domestic and external conditions and the reaction of financial markets”.

Commenting on monetary policy outlook, Emiko Bowles, analyst at Standard Chartered, said:

“We expect the economy to contract by 15% in 2022 [and] the Central Bank to keep monetary conditions accommodative as companies adapt to new trade restrictions and logistical challenges caused by sanctions and capital controls. […] We lower our end-2022 and end-2023 policy rate forecasts to 10.0% (from 16.0%) and 8.0% (from 10.0%). We expect a gradual decline in the key rate for the rest of 2022 and in 2023, against a backdrop of recession.”

The Bank of Russia will hold its next key rate review meeting on 10 June

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