Russia Monetary Policy July 2020

Russia: Central Bank trims key policy rate to fresh low in July

At its meeting on 24 July, the Board of Directors of the Central Bank of the Russian Federation (CBR) cut the key interest rate by 25 basis points to a fresh record low of 4.25%. The decision, which followed a 100-basis-point chop in June and was largely expected by most market analysts, came amid shrinking economic activity and waning inflationary risks due to a severe fallout from Covid-19.

An unprecedented pandemic-led downturn in economic activity drove the Bank’s decision to further ease its monetary policy stance in July. Despite improving somewhat in July, the economic panorama remains grim going into Q3, after the economy likely shrunk severely in Q2. In turn, constrained demand continues to weigh on inflation expectations, with the Bank noting that “the [economic] recovery will take over 1.5 years, which will have a restraining effect on prices”. Thus, the CBR’s moved is aimed at stabilizing inflation at the target rate over a multi-year forecast horizon against the “risk that in 2021 inflation might deviate downwards from the 4.0% target.”

In the accompanying statement, the CBR maintained 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 now expects GDP to shrink by 4.5–5.5% in 2020, after an estimated 9.0–10.0% contraction in Q2. Meanwhile, inflation is projected to return to the target level gradually as demand slowly recovers, with inflation seen in between 3.5% and 4.0% in 2021 before stabilizing close to 4.0% in 2022.

Commenting on the monetary policy outlook, Artem Zaigrin, chief economist at SOVA Capital, said:

“In our view, the CBR took a more cautious stance towards accommodative policy (two by 25bps) and chose several smaller cuts to a big one (50bps). We expect similar action in September so that the key rate could finish the rate-cutting cycle at 4.0% by end 3Q20. Inflation projections of 3.8-4.2% by YE20 and of 3.5-4.0% YoY 2021 mean for us that CBR could end the cycle at 4.0%. We think that faster-than-expected budget consolidation could unlock the 3.5-4.0% key rate territory for the monetary authorities.”

The Bank of Russia will hold its next key rate review meeting on 18 September 2020.

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