Russia’s central bank cut interest rates on Friday to protect the economy from the effects of Western sanctions, saying the recent return of the ruble had eased inflationary pressures.
The Bank of Russia has said it will cut its key interest rate from its previous high of 20 percent to 17 percent. At the end of February, the cost of borrowing more than doubled in late February as the United States and its Western allies responded to the invasion of Ukraine by tightening fiscal measures, including freezing a large portion of Ukrainian President Vladimir Putin’s foreign reserves.
With Friday’s unplanned move, the central bank is now shifting its focus to kick-starting Russia’s struggling economy, which seems to be paying off in an effort to stabilize the financial system, analysts say.
“Today’s decision reflects a rebalancing of the risks of accelerating consumer price growth, declining economic activity and risks of financial stability,” the bank said. Although it warns that “external conditions for the Russian economy” will “significantly limit economic activity”, it says the risk to financial stability is no longer increasing.
It added that the rate at which prices have risen has been “slowing down” due to the dynamics of the ruble’s exchange rate.
In the immediate aftermath of the February 24 attack, the ruble has returned to a steep fall as a result of tight controls that have hampered Russia’s ability to buy foreign currency and prevented foreigners from leaving Russia for their investments. The ruble traded around 79 79 on Friday, near pre-attack levels.
According to Sophia Donets, Russian economist at Renaissance Capital, the effectiveness of these measures means that the central bank may be less dependent on high interest rates to support the currency, and may focus on supporting the economy through the possibility of a recession.
“The recent appreciation of the ruble gives an indication that capital controls are working. It is no longer an open economy but a closed financial system so interest rate policy will work differently, “he said.
“The economy has a supply shock, a structural shock, so you have to see the supply chains rebuilt. It depends on the availability of credit. “
Economists at the Institute of International Finance estimate that Russia’s gross domestic product will shrink by 15 percent this year, erasing a decade and a half of growth.
Analysts expect the central bank to announce further rate cuts.
Eger Rapokhin, a senior debt market strategist at SberCIB Investment Research, said: “If the situation continues to evolve, the key rate could be reduced to 10 percent by the end of the year.”
“It cannot be ruled out that the original rate will be brought down to 15 per cent at the next meeting on April 29,” he added.
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