Russia Slashes Key Rate By 300 Bps

(RTTNews) - Russia's central bank slashed its key interest rate sharply by 300 basis points, on Thursday, citing a slowdown in inflation and the recovery in the currency exchange rate.

At an emergency meeting, the Board of Directors of Bank of Russia decided to cut the benchmark rate to 11.00 percent from 14.00 percent.

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 900 basis points.

The bank observed that funds continue to flow into fixed-term ruble deposits while lending activity remains weak. This limits proinflationary risks and makes it necessary to ease monetary conditions, the board said.

Further, the bank noted that external conditions for the Russian economy are still challenging, considerably constraining economic activity.

Signaling monetary policy easing, the central bank today said it "holds open the prospect of key rate reduction at its upcoming meetings."

Given the monetary policy stance, the bank expects annual inflation to decrease to 5.0-7.0 percent in 2023 and return to 4 percent in 2024.

A report released by the central bank on Thursday, showed that households' inflation expectations decreased in May and returned to the level of May 2021. One-year ahead inflation is seen at 11.5 percent.

"At today's unscheduled Board meeting underscores that high oil and gas revenues and the rally in the ruble have given policymakers room to reverse emergency measures introduced since February," William Jackson, an economist at Capital Economics, said.

The economist noted that the key point is that high oil and gas revenues are providing policymakers with a lifeline, allowing them to row back emergency economic measures. Against that backdrop, a further easing of capital controls and additional rate cuts seem likely.