Russia Monetary Policy June 2022

Russia: Central Bank cuts rate to pre-war level in June

At its meeting on 10 June, the Central Bank of the Russian Federation (CBR) cut its key interest rate from 11.00% to 9.50%. The move marked the fourth consecutive cut since the beginning of the war and brought the key rate back to its pre-war level. The decision was chiefly driven by softening inflation amid a stronger ruble, and represented the Bank’s efforts to support the ailing economy.

Price pressures seem to have peaked halfway through the second quarter. Inflation moderated to 17.1% in May from April’s 17.8%, which had marked the highest reading since January 2002. An unprecedented rally of the ruble due to capital controls, cooling demand and lower inflation expectations was primarily behind the slowdown. Moreover, the Central Bank highlighted risks of stagflation as international sanctions hammer the Russian economy—which seemingly plunged into contraction in Q2.

Moving forward, the outlook remains uncertain. In its communique, the Bank stated that it “will consider the necessity of key rate reduction at its upcoming meetings”, against the backdrop of “risks posed by domestic and external conditions and the reaction of financial markets”. The CBR expects inflation to average 14.0–17.0% in 2022, before cooling to 5.0–7.0% in 2023 and returning to the 4.0% target in 2024. The majority of our panelists see further monetary policy easing by year-end. An extremely volatile external backdrop is the key risk to the outlook.

Commenting on the monetary policy outlook, Artem Arkhipov and Ariel Chernyy, economists at Unicredit, said:

“The CBR will have to monitor the balance between demand and supply, as both are likely to remain weak or to decline further. If demand continues to fall faster than supply, then the CBR might have to cut more aggressively than it currently suggests. If supply drops because Russian companies are unable to find adequate substitutes to missing imports, then a positive output gap might arise even if domestic demand remains weak. In such a scenario, the CBR’s moves would be less clear, with the scope for additional easing being limited. […] In our view, the most likely range for the key rate is 8.0-9.0% by the end of 2022. In 2023, the CBR could cut to 7.0-8.0% as inflation falls to 7.0%.”

The Russia’s Central Bank is scheduled to hold its next key rate review meeting on 22 July.

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