Russia Lowers Key Rate By 50 Bps

(RTTNews) - Russia's central bank lowered its key rate by a half-percentage point on Friday, after delivering sharp reductions since April.

The Board of Directors of Bank of Russia decided to reduce the benchmark rate by 50 basis points to 7.50 percent from 8.00 percent.

In case of a further budget deficit expansion, tighter monetary policy may be required to return inflation to target in 2024 and keep it close to 4 percent further on, the bank said in the statement.

After Russia invaded Ukraine in late February, the central bank hiked its interest rate sharply to 20.00 percent from 9.50 percent. Later, the bank slashed the rate by cumulative 1250 basis points.

The easing cycle is entering a slower phase, Capital Economics economist William Jackson said. The economist currently expects one further 50 basis point interest rate cut this year to 7.00 percent, followed by a further 150 basis point of cuts in 2023.

Policymakers observed that developments in business activity are better than the bank expected in July. However, the external environment for the Russian economy remains challenging.

The bank noted that inflation expectations of households and price expectations of businesses remain elevated.

Given the monetary policy stance, the central bank estimated annual inflation to fall to 5.0-7.0 percent in 2023 from an estimated 11.0-13.0 percent in 2022. Inflation is expected to return to 4 percent in 2024.

The bank today said the decline in GDP for this year is likely to be closer to the upper bound of the July forecast range -6.0 percent to -4.0 percent.