Russia Monetary Policy June 2020

Russia: Central Bank slashes key policy rate to record low in June

At its meeting on 19 June, the Board of Directors of the Central Bank of the Russian Federation (CBR) chopped the key interest rate by 100 basis points to a record low of 4.50%. The decision, which followed a 50-basis-point cut in April and was widely expected my market analysts, came on the back of a deteriorating economic panorama due to fallout from the Covid-19 pandemic.

A severe worsening of economic conditions in the second quarter drove the Bank’s decision to further slash its monetary policy stance. The economy will have likely contracted sharply in Q2 as low oil prices dented exports, while lockdown restrictions extinguished consumer demand and forced non-essential businesses to shut . Moreover, inflation remained low in April–May and well below the Bank’s expectations, noting “the disinflationary effect of weak demand has strengthened due to both current and deferred economic effect of restrictions.” This, coupled with a strong rebound in ruble and retreating risks to financial stability, further cemented the Bank’s decision to ease its monetary policy stance.

In its accompanying statement, the Bank largely kept its dovish tone, noting that “if the situation develops in line with the baseline forecast, [the CBR] will consider the necessity of further key rate reduction at its upcoming meetings”. The Bank confirmed its projection of GDP shrinking by 4.0–6.0% in 2020, saying that the contraction in Q2 “could prove more sizeable than expected ”. In terms of prices, the Bank highlighted abating household and business inflation expectations, stressing that “in the context of prevailing disinflationary factors, there is a risk that in 2021 inflation might significantly deviate downwards from the 4.0% target ”.

Commenting on the monetary policy outlook, Anatoliy A Shal , an economist at JPMorgan, said:

“We think that the CBR had been behind the curve going into this meeting and by cutting 100bp caught up only partially […] That said, the governor made it clear that further easing steps will be less aggressive and decisions more data dependent. We stick to the view that the key rate will next be cut by 50bp in July, followed by a pause, but odds are there that the board will opt for more cautious approach and spread the cuts over July-September (25+25) […] We don’t anticipate monetary policy to return to neutral for at least the next two years, as we expect the economy to stay below potential at least through end-2021.”

The Bank of Russia will hold its next key rate review meeting on 24 July 2020 .

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