Russia Monetary Policy March 2022

Russia: Central Bank keeps rate at 20.00%, expects GDP to contract this year

At its meeting on 18 March, the Central Bank of the Russian Federation (CBR) held its key interest rate stable at 20.00%. The decision followed an emergency hike on 28 February, when the Bank more than doubled its key rate in order to aid the crashing ruble and support financial stability following Russia’s invasion of Ukraine. CBR’s move came in line with expectations of most market analysts and reflected a seemingly stabilizing macro-financial environment.

The Bank’s emergency move in late February appears to have mostly sustained financial stability, and somewhat capped soaring inflation and the depreciation of the ruble, thus allowing the CBR to stand pat in mid-March. That said, inflation has reportedly surged since early March, due to a punier ruble and increased consumer demand for select goods amid panic buying, higher uncertainty and rising inflation expectations.

Against the backdrop of the continued war in Ukraine and an associated rollout of further international sanctions, the Bank expects GDP to contract over the coming quarters, as production and logistic disruptions bite especially hard. CBR sees the economy “entering the phase of a large-scale structural transformation, which will be accompanied by a temporary but inevitable period of increased inflation.”

In its forward-looking statement, the Bank highlighted its objective of enabling “a gradual adaptation of the economy to new conditions and a return of annual inflation to 4.0% in 2024.” That said, despite CBR’s reaffirmed commitment to price stability, the monetary outlook is difficult to gauge due to prevailing pro-inflationary risks over the entire forecast horizon amid uncertainty stemming from the Russia-Ukraine war and associated sanctions. The speed at which the economy adapts to the new reality and the levels of fiscal and monetary policy supportiveness are also key factors to watch.

Commenting on the Bank’s latest decision, Artem Zaigrin, chief economist at SOVA capital said:

“Going forward, the key issue should be stabilizing the banking system and encouraging people towards ruble-denominated deposits, as well as addressing liquidity conditions on the FX market […]. With inflation risks skewing to the upside following further supply and logistics shocks, we could see additional tightening in the coming months to support demand for deposits, which should keep real rates positive, e.g. the key rate at 25–30% in April-June if risks continue to materialize.”

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

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