September 28, 2022
bne IntelliNews - CBR cuts rates again to 8%, below pre-war levels

The Central Bank of Russia (CBR) continued its aggressive rate cutting cycle on July 22, slashing rates another 150bp to 8%, well below the pre-war levels.

The CBR more than doubled interest to 20% on February 28 a few days after Russian forces crossed the border into Ukraine to contain the inevitable shock to the currency and to contain soaring inflation. The fast action seems to have worked as inflation has begun to fall from its peak of 17.8% in April to 15.9% in June (chart).

As the Russian economy stabilised the CBR has since cut the rate three times bringing the price rate back to the pre-war level of 9.5% on June 10. Analysts believe that more cuts may be on the cards before the end of this year as a looming recession will further reduce inflationary pressures, but that the scope for big cuts is now limited as the easing cycle is close to its end in the current environment.

“We think the scope for further large cuts is now limited and we expect interest rates to end the year around 7.00%,” Capital Economics said in a note. “That brings the total amount of easing since April to 12%-pts and takes interest rates below their level of December last year. The central bank emphasised that inflation risks have continued to ease. The statement noted that “current consumer price growth rates remain low” and that “short-term disinflationary risks have grown.”

The cut came in at the top of the expectations range of 25bp to 150bp, and confirms earlier speculation that the CBR’s priorities have switched from containing inflation to promoting growth. While most of the rest of the world is battling with soaring inflation and growing stagflation concerns, Russia is the only country in Europe where inflation has already passed peak and is now falling. The CBR revised its year-end inflation forecast lower for the second consecutive meeting, from 14-17% y/y to 12-15% y/y.

However, the economic outlook, while improved recently, remains poor. The CBR cut its estimates for an economic contraction recently in its macroeconomic survey earlier this month, but still expects the economy to contract by 6.1% this year, following a 4.3% contraction in May (chart).

The rate cut will also help to weaken the ruble which has become painfully strong in the wake of super earnings from raw materials and weak consumer demand. The cut was also motivated by falling inflation expectations that were running very high before the war started.

“The central bank clearly did not feel the need to slow the pace of rate cuts given the easing of inflation risks and the extent of the hit to economic activity. It maintained its guidance that it will consider the necessity of further rate cuts. That said, we think further cuts will be more gradual going forward. Russia’s 12-month ahead inflation-adjusted policy rate is now less than 3%, which is its average over 2016-19. We think the large moves in rates have probably now happened and that cuts of 100bp or lower are more likely going forward,” Capital Economics said. “Overall, we now expect the policy rate to end this year at 7.00% (previously 7.50%) and 2023 at 5.50%, which is lower than most expect.”

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