Russia’s key rate below inflation for first time since 2015
Head of the Central Bank Elvira Nabiullina considers that Russia is close to the trough of the key rate cycle. Nonetheless, the regulator’s policy will remain accommodative next year to support the Russian economy in its struggle with the COVID-19 pandemic.
Russia is nearing the end of its monetary easing cycle after it cut interest rates to a record low, says Bloomberg citing the Bank of Russia’s Governor Elvira Nabiullina. At its past two meetings, the regulator kept rates on hold at 4,25% but left the door open to more easing. Meanwhile, inflation accelerated to 4,4% in November after a slump in the value of the ruble. Thus, the key rate has fallen below inflation for the first time since 2015.
“After 350 basis points rate cuts since last summer, we are already close to the trough of the key rate cycle,” said Nabiullina. However, she noticed that it was too early to give a clear signal about how the Central Bank would act at its next policy meeting on 18 December. As for next year’s monetary policy, the regulator expects it to remain accommodative and support the economy.
The Central Bank will “assess carefully” whether the factors that drove the recent consumer price growth are temporary. Nonetheless, the bank expects that after a rebound in the third quarter of 2020, growth will flatten in the final quarter and at the beginning of 2021. The current resurgence of the pandemic is likely to add to pressures pushing price growth lower, according to Nabiullina. She added that the Central Bank sees “very modest” room for easing next year.
Economists are divided on whether the next rate cut will be announced next week or at some point next year. The International Monetary Fund said last month that Russia should continue cutting rates to support the economy. It also warned that inflation is likely to fall below the Central Bank’s target of 4% and remain there for a long time. Other experts are forecasting no further cuts with some of them even expecting rate hikes in 2021.
“We think that we will reach the pre-pandemic mark in terms of the economy by the first half of 2022,” said Nabiullina. Although it gives the regulator a base for additional easing, it depends on many factors, she added. “We know that the situation is characterised by high uncertainty.” She also admitted that there was a long-term trend for lower demand for fossil fuels. Thus, the Central Bank is sticking to its long-term assumption that oil won’t go above $50 per barrel.