Russia Monetary Policy March 2020

Russia: Plunging ruble prompts Central Bank to pause despite looming economic downturn

At its 20 March meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) kept the key interest rate stable at an over six-year low of 6.00%. The hold, which was in line with market expectations, marked a pause to the monetary policy easing cycle after six consecutive rate cuts. The Bank’s decision reflected its short-term objective of providing support to the plummeting ruble and came despite the looming threat of a global economic recession as the Covid-19 pandemic spreads.

A rapidly deteriorating external backdrop left the CBR in a tough spot as the Bank faced a dilemma over protecting the ruble or supporting economic activity. On the one hand, the fast-spreading Covid-19 pandemic has severely hindered global economic activity, in turn prompting a marked downturn in global commodity prices and fueling fears of an impending recession. On the other hand, plunging oil demand and soaring global oil production due to the ongoing price war between Saudi Arabia and Russia sent global oil prices crashing in early March, in turn triggering a sharp ruble depreciation and prompting the Central Bank to intervene by selling foreign currency to stabilize the ruble.

With these factors at play, the CBR kept the rate stable: The hawkish argument stemming from currency weakness and mounting concerns over financial stability appears to have outweighed the dovish argument relating to slowing inflation and faltering GDP growth. The Bank introduced several measures aimed at softening the downturn in the coming months, including a RUB 500 billion lending facility to offer loans to small- and medium-sized businesses at a 4.0% interest rate. Nevertheless, in the global context, both the Bank’s assessment of the coronavirus impact on the Russian economy and its measures to combat it appear rather conservative. As highlighted by Anatoly Shal, an economist at JPMorgan:

“One aspect where we are not on the same page with the CBR is the assessment of economic damage from the double shock that Russia is facing. The CBR expects [annual] growth in both Q2 and the full year to be positive, while we expect both to be deeply in the red. […] Beyond rates, the CBR’s response to the crisis was manifold, although arguably lacking scale. […] As fiscal policy remains constrained by oil shocks and the budget rule and may only reallocate some of the spending lines, Russia’s aggregate policy response appears conservative compared to many other countries.”

Looking forward, the monetary policy outlook appears increasingly uncertain, with the Bank’s policy dependent on global oil price movements, ruble volatility, the full impacts of the coronavirus, and inflationary trends.

Commenting on the outlook, Dmitry Dolgin, chief economist at ING, noted:

“Overall, we see the key rate remaining at 6.0% for a long period of time, possibly until the end of 2020, amid an acceleration in CPI from the current 2.3% yoy to 4.2% by year-end, and possibly higher, which would mean a gradual reduction in the real key rate and suggest an easing in monetary policy. Meanwhile, we reiterate the reduced importance of the key rate at this time, and expect markets to refocus on fundamentals and key rate expectations at a later date. For now, the prospect of Russia exiting the emergency financial measures regime is clouded by the continued spread of the coronavirus in a number of countries, including Russia, the rapid deterioration in the economic growth forecasts, persistent foreign policy uncertainties and high volatility on the commodity and financial markets.”

The next monetary policy meeting is scheduled for 24 April.

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