Russia chops key interest rate to pre-crisis level of 9.5%

National flag flies over the Russian Central Bank headquarters in Moscow, Russia May 27, 2022. REUTERS

June 10 (Reuters) – Russia’s central bank cut its key interest rate to the pre-crisis level of 9.5% on Friday and said it would continue to explore the scope for more cuts as inflation slows from near 20-year highs and economic contraction looms.

The bank had hiked its rate from 9.5% to 20% in the immediate aftermath of Moscow’s despatch of armed forces into Ukraine on Feb. 24, but had since cut rates three times in steps of 300 basis points – the last of them two weeks ago. read more

Friday’s rate cut exceeded average expectations of a 100-basis-point move in a Reuters poll from earlier this week. read more

But the rouble extended gains and firmed to 57.31 against the dollar , its strongest since May 25, from levels around 57.70 shortly before the rate move. RUB/RU

“The Bank of Russia will consider the necessity of a key rate reduction at its upcoming meetings,” the bank said in a statement.

The wording of the statement suggests that further cuts will be more gradual and cautious, said Sofia Donets, chief economist at Renaissance Capital, predicting that the rate will be lowered to 8% by the end of the year.

Governor Elvira Nabiullina said in May that her bank would return to standard 25-basis-point rate moves once its key interest rate has reached single digits.

The latest cut brought the key rate far below annual inflation, which stood at 17.0% as of June 3, according to the central bank.

It has said it hopes inflation will fall to its 4% target in 2024.

It revised its inflation forecasts and now expects consumer prices to increase by 14-17% in 2022 compared with its previous forecast of an 18-23% rise.

“Current inflation is appreciably below the Bank of Russia’s April forecast,” it said.

High inflation dents living standards and has been one of the key concerns among Russians for years, but Russia needs cheaper lending to help the economy overcome sweeping Western sanctions. read more

The central bank said a decline in economic activity in the second quarter was less pronounced than expected, and that the full-year contraction could also be lower than it forecast in April. The economy grew by 4.7% in 2021.

Nabiullina will shed more light on the bank’s forecasts and policy plans in a media briefing at 1200 GMT.

The next rate-setting meeting is scheduled for July 22.

Reporting by Reuters; Editing by Kevin Liffey

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