Russia Monetary Policy May 2022

Russia: Central Bank slashes rate by further 300 basis points to 11.00% at the end of May

At an unscheduled meeting on 26 May, the Central Bank of the Russian Federation (CBR) cut its key interest rate from 14.00% to 11.00%. The rate cut marked the third consecutive 300 basis point rate cut since 8 April, after an emergency hike to 20.00% in late February. The move reflected the Bank’s efforts to support economic activity and was at least partly driven by its aim to cool the ruble’s rapid appreciation amid easing inflationary pressures.

The macro-financial backdrop changed has fundamentally since the beginning of the war, paving the way for the CBR to markedly soften its contractionary monetary policy stance following an initial rate hike. Inflation seems to have peaked half-way through Q2, with the Bank saying that pressures eased “on the back of the ruble exchange rate dynamics as well as the noticeable decline in inflation expectations of households and businesses”. Inflation reportedly slowed to 17.5% in late May, from 17.8% in April, decreasing faster than the CBR’s April forecast. Meanwhile, lending activity remained weak in recent weeks, pointing to reduced pro-inflationary risks.

Turning to foreign exchange, the CBR successfully stabilized the ruble after the initial plunge to a record low; the currency soared to a seven-year high against the USD at the end of May. Although a stronger ruble has helped to contain inflation, its ascent seems to have produced notable downsides. A soaring ruble bodes poorly for an already struggling domestic economy, puts pressure on government finances by lowering the local currency value of dollar-denominated oil and gas revenues, and worsens the competitiveness of Russian exporters. All this seems to have pushed the CBR to slash the interest rate earlier and by more than expected.

Moving forward, the outlook remains volatile. The Bank will likely have to further loosen capital controls to tame the ruble, although this carries the risk of opening the floodgates to capital outflows from the country. Regarding its monetary policy, more rate cuts are on the table, with the CBR saying that its decisions will be driven by “actual and expected inflation dynamics relative to the target and economic transformation processes, as well as risks posed by domestic and external conditions and the reaction of financial markets”. The Bank expects inflation to ease to 5.0–7.0% in 2023 and return to its target rate of 4.0% in 2024, unchanged from its previous guidance.

Commenting on the outlook for the ruble in light of the CBR’s aggressive rate cuts, Dmitry Dolgin, economist at ING, said:

“USD/RUB will be ending the year at around 75 as the partial or potential total EU embargo on Russian oil hits in H2 2022, while at the same time Russian resident demand for FX and imports start to stabilize. Before then, however, and because USD/RUB is mainly being driven by Russian commercial flows, a large rate cut may not send the ruble too much lower in the near term.”

The Bank of Russia is scheduled to hold its next key rate review meeting on 10 June.

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