The Bank of Russia has decided to cut the reference interest rate by 150 basis points, which will thus stand at 8%, its lowest level since December 2021 and below 9.50% at the beginning of the invasion of Ukraine at the end of last February, after detecting a substantial drop in inflation expectations and a less intense than expected deterioration in activity.
The announced rate cut, the fifth in a row since April, has far exceeded the expectations of the market consensus, while the institution led by Elvira Nabiullina has indicated that at the central bank meetings in the second half of the year it will assess the need for a additional reduction of reference rates.
“Current CPI growth rates remain low, contributing to a further slowdown in annual inflation (…) Household and business inflation expectations have declined significantly and the decline in business activity is slower than what I expected,” the bank said, warning of the difficulties presented by the external environment of the Russian economy, which continues to significantly restrict economic activity.
The Bank of Russia was forced on February 28 to raise interest rates from 9.50% to 20% to urgently respond to the impact on inflation and the country’s financial stability of the international sanctions imposed by the West after the invasion of Ukraine.
In its analysis, the Russian central bank points out that household inflation expectations and business price expectations decreased significantly in July, reaching levels of spring 2021, largely reflecting the strengthening of the ruble and the general slowdown in inflation, while professional analysts’ medium-term inflation expectations are close to 4%.
In its baseline scenario, the Bank of Russia now expects annual inflation to hover between 12% and 15% by the end of 2022 and, given the monetary policy stance, expects the rate to fall to a range between 5% and 7% in 2023 to moderate to 4% in 2024, in line with the central bank’s target.
On the other hand, the institution highlights that the slowdown in business activity is being less than expected and a gradual improvement in business sentiment is observed as suppliers and sales markets diversify, while consumer activity remains moderate. , but is beginning to show signs of recovery amid a gradual increase in imports of consumer goods.
Also, the situation in the Russian labor market remains stable and, although the number of vacancies has decreased, the unemployment rate is close to historical lows.
In this way, according to its reference scenario, the Bank of Russia foresees a contraction of the GDP in 2022 of between 4% and 6%, while the fall of the economy in 2023 would be limited to a range between 4% and 1% to return to growth in 2024, with an estimated expansion of between 1.5% and 2.5%.
Source: Europa Press
