Russia Monetary Policy April 2022

Russia: Central Bank cuts rate to 17.00% in a surprise meeting

At an unscheduled meeting on 8 April, the Central Bank of the Russian Federation (CBR) cut its key interest rate by 300 basis points to 17.00%. The rate cut followed an emergency hike on 28 February and a decision to stand pat on 18 March. The CBR’s unexpected move suggests that despite soaring inflation, the Bank’s efforts to stabilize the country’s financial system are, at least partially, having the desired impact, allowing the CBR to turn its focus to supporting economic activity.

The Bank’s decision reflected a changing macroeconomic panorama. After sliding to an all-time low in the wake of the country’s invasion of Ukraine, the ruble largely recovered most of its previous losses against the U.S. dollar by early April. 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. According to the CBR, “financial stability risks […] have ceased to increase for the time being, including owing to the adopted capital control measures. Annual inflation will continue to rise due to the base effect. Yet, the latest weekly data point to a noticeable slowdown in the current price growth rates, including owing to the ruble’s exchange rate dynamics.”

As a result, the Bank seems to have shifted its focus to the economy, saying that the rate cut “reflects a change in the balance of risks of accelerated consumer price growth, decline in economic activity and financial stability risks.” Our panelists currently forecast Russian GDP to contract by 8.4% in 2022, with further downward revisions likely in the coming weeks as international sanctions threaten to wipe out over a decade and a half of growth.

Looking forward, provided that the ruble continues to hold its ground against the USD and inflationary pressures remain somewhat contained, the CBR is likely to further reduce its key policy rate as it aims to spur economic activity. That said, the outlook is highly uncertain, with much depending on the course of the war, possible new sanctions by Western allies, and authorities’ willingness to maintain current intrusive polices. Notably, the ruble plunged sharply on 11 April, following the rate cut and after the CBR announced its plans to relax capital control measures.

The Bank of Russia will hold its next key rate review meeting on 29 April.

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