Russia slashes interest rates in scramble to weaken the rouble

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Moscow has slashed interest rates back to pre-invasion levels as officials try to weaken the rouble.

The Central Bank of Russia (CBR) cut its benchmark borrowing rate by 1.5 percentage points to 9.5pc, and signalled further reductions may be coming.

Officials have now fully reversed an emergency increase to 20pc intended to tame inflation in the early weeks of the Ukraine conflict.

The CBR said: “Inflation is slowing faster and the decline in economic activity is of a smaller magnitude than the Bank of Russia expected in April.”

It said policymakers would “consider the necessity of reducing the key rate at its upcoming meetings.”

Inflation in Russia slowed during May to 17.1pc, from the two-decade high of 17.8pc reached in April. The CBR predicted inflation through 2022 as a whole would average between 14pc and 17pc.

Softening the rouble and stimulating Russia’s sanction-struck economy have become bigger priorities for the Kremlin, which is facing the biggest GDP slowdown of any developed country this year.

The rouble is currently trading near a four-year high at 58 to the dollar, having rapidly recovered due to Moscow’s introduction of capital controls and higher rates, as well as an extraordinary trade surplus spurred by plunging exports and high oil prices.

A strong currency risks making Russia’s imports less lucrative, and also drives costs higher.

Liam Peach from Capital Economics said: “Strict capital controls and the adjustment in the ruble have been instrumental in Russia’s stabilisation since March.

“But with inflation risks now contained, policymakers no longer seem to desire such a strong currency, and a weaker ruble may provide more support to the economy.”

He added “we think today’s cut will be followed by less aggressive easing later this year”, predicting the CBR would reduce rates to 8pc by 2023.

Tatiana Orlova from Oxford Economics said the statement was “less dovish” than other recent ones have been.

Analysts at ING said they would not expect the rouble’s rally to cool significantly until later in the year, when Western countries begin to significantly curb energy purchases.

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