Bank of Russia’s new cut brings interest rate to pre-crisis level

Bank of Russia’s new cut brings interest rate to pre-crisis level
Photo: Kuba

The Central Bank of Russia decreased its key interest rate in line with market expectations on 13 December. The cut of 0,25% has become the fifth in 2019 marking weaker real and expected inflation. According to the regulator’s signals, further cuts are possible but not inevitable.

Russia’s Central Bank has cut interest rates by 25 basis points to 6,25%, reports Financial Times. On Friday, the regulator cut the indicator for the fifth time in 2019, increasing this year’s total rate reduction to 150 basis points. As a result, the key interest rate has reached its lowest level since before the 2014 financial crisis, when Governor of Central Bank Elvira Nabiullina raised it to 17%. “Inflation is slowing more quickly than was predicted. People’s inflation expectations are continuing to slow,” the regulator said in a statement.

According to Nabiullina, the Central Bank “still sees space for cutting the key rate, but [at the next board meeting] in February and at future meetings we will evaluate whether such a step is justified and appropriate again, based on all the new data we will have at that time”. She pointed out that her statement did not mean that “cutting rates in February or even the first half [of next year] is inevitable”. The regulator will “evaluate the prospects for cutting key rates further [...] by taking into consideration real and expected inflation against the target, prospects for economic growth and risks from internal and external reactions on financial markets”.

The Central Bank targets inflation as the key indicator. According to the bank’s expectations, inflation will fluctuate between 3,5% and its target of 4% in 2020 and remain at around 4% the year after. Chief Economist for Russia and CIS at Citibank Ivan Tchakarov considers that the regulator is most likely to make one further cut before holding rates at 6%. “Should the economy surprise to the upside in 2020, as we expect on the basis of some undergoing policy shifts to deliver more robust stimulus, we see the policy rate remaining at this level for the whole of 2020,” he said in a note.

According to head of Central Bank Elvira Nabiullina, the regulator “still sees space for cutting the key rate”. Photo: kremlin.ru

In October, the Bank of Russia surprised economists by decreasing the interest rate by 50 basis points, which was Russia’s largest rate cut in two years. Financial Times believes it was a signal that Elvira Nabiullina was prepared to abandon her conservative fiscal policy amid dire warnings about Russia’s growth prospects. The Central Bank expects Russia’s GDP to grow between 0,8% and 1,3% this year, while other officials and economists consider it may be closer to zero.

The country’s Ministry of Finance plans to stimulate growth by spending money from the National Welfare Fund on domestic infrastructure and loans to foreign companies to buy Russian goods. Although the Central Bank had warned that it could drive inflation, Nabiullina said there would be “no big macroeconomic consequences if those funds are used properly”.

By Anna Litvina