Russia Monetary Policy September 2022

Russia: Central Bank slashes key policy rate further in September

At its meeting on 16 September, the Central Bank of the Russian Federation (CBR) chopped its key interest rate by 50 basis points to 7.50%. The move marked the sixth consecutive cut since the beginning of the war in late February. Notably, the Bank’s communique signaled that the easing cycle has now likely come to an end.

The Bank’s move came on the back of the sustained softening of inflationary pressures and contracting economic activity. Inflation declined in August to 14.3% (July: 15.1%), and, according to weekly data, eased further in early September. This was chiefly due to a resilient ruble, weak consumer demand and a larger supply of certain goods amid export controls. Meanwhile, GDP is set to contract at a sharper pace in Q3, amid a drop in real incomes of households and as sanctions undermine production capabilities among manufacturers and services providers.

The Bank’s communique was significantly less dovish in September, stating, “We believe that we now have less room for reducing the key rate”. On the one hand, the economy seems to be holding up better in Q3 than what the CBR expected in July. On the other hand, inflation expectations remained elevated in August, while monthly core inflation ticked up. As a result, the Bank signaled its readiness to stop monetary policy easing and even hinted at the possibility of a rate hike ahead.

The CBR projects inflation to ease to 12.0–13.0% in 2022, then to 5.0–7.0% in 2023, and return to the 4.0% target in 2024. Meanwhile, the Bank expects the decline in GDP to contract by 4.0–6.0% in 2022.

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