Russian central bank slashes key rate to 8%, will study need for more cuts

[July 22, 2022]  MOSCOW (Reuters) -Russia's central bank cut its key interest rate by a sharper-than-expected 1.5 points to 8.0% on Friday and said it would study the need for further cuts as inflation slows and the economy dips into recession.

National flag flies over the Russian Central Bank headquarters in Moscow, Russia May 27, 2022. REUTERS/Maxim Shemetov/File Photo

It was the fourth cut this year. In the immediate aftermath of Moscow's despatch of armed forces into Ukraine on Feb. 24, the central bank had hiked its key rate to 20% from 9.5% in order to reverse a plunge in the value of the rouble.

In a Reuters poll earlier this week, most analysts had expected a smaller cut of 50 basis points from 9.5%.

"The Bank of Russia will consider the necessity of a key rate reduction in the second half of 2022," it said in a statement.

The rouble extended losses, sliding to 58.13 against the dollar minutes after the rate decision, from 57.57 seen shortly before.

"Apparently the regulator has decided to act more aggressively than previously thought, as inflation is falling faster than in forecasts," analysts at Promsvyazbank said.

Annual inflation slowed to 15.5% as of July 15, the central bank said, lowering its 2022 inflation forecast to 12-15% from its previous assessment of 14-17%. It reiterated its hope that inflation would fall to its 4% target in 2024.

High inflation dents living standards and has for years been one of Russians' main concerns, but the economy needs stimulation in the form of cheaper credit to address the negative effects of sweeping Western sanctions.

The central bank revised its economic forecasts for this year, saying gross domestic product would contract 4-6%. In late April, it had said GDP would shrink 8-10%.

"The external environment for the Russian economy remains challenging and continues to significantly constrain economic activity," the central bank said.

"Consumer activity remains subdued, but is beginning to recover, including amid a gradual increase in imports of consumer goods."

In 2023, the economy will contract by 1-4%, the central bank said, revising its earlier forecast that the economy would shrink by up to 3% next year.

Central Bank Governor Elvira Nabiullina will shed more light on the bank's forecasts and policy in a media briefing at 1200 GMT. The next rate-setting meeting is scheduled for Sept. 16.

(Reporting by Reuters; Editing by Kevin Liffey and Catherine Evans)

 

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