The Russian Central Bank cut its key interest rate from 14 percent to 11 percent on Thursday, citing a slowing of inflation and the ruble's recovery.
Following an extraordinary meeting, policymakers decided on another 300 basis point cut, the Bank's third since an emergency hike of the key rate from 9.5 percent to 20 percent following Russia's invasion of Ukraine and the imposition of punitive sanctions by Western powers. The CBR also imposed strict capital controls at the time in order to lessen the impact of sanctions and support the ruble.
"The latest weekly data point to a significant slowdown in the current price growth rates," t he CBR said in a statement Thursday. "Inflationary pressure eases on the back of the ruble exchange rate dynamics as well as the noticeable decline in inflation expectations of households and businesses."
"In April annual inflation reached 17.8%, however, based on the estimate as of 20 May, it slowed down to 17.5%, decreasing faster than in the Bank of Russia’s April forecast."
After plummeting to a two-year low of 150 rubles to the dollar on March 7, just weeks after Russian troops launched an unprecedented invasion of Ukraine, the CBR's capital controls have pushed the currency back to a two-year high, briefly touching 53 rubles to the dollar on Tuesday.
On Thursday morning, the ruble fell against the dollar, trading at 60.80 per dollar.
The CBR announced on Thursday that funds have continued to flow into fixed-term ruble deposits, despite weak lending activity, limiting inflationary risks.
"External conditions for the Russian economy are still challenging, considerably constraining economic activity. Financial stability risks decreased somewhat, enabling a relaxation of some capital control measures ," the CBR added.
After previously warning that the Russian economy must undergo a "large-scale structural transformation" to mitigate the impact of sanctions, the central bank said future interest rate decisions would take into account actual and expected inflation dynamics in relation to its target and efforts to transform the Russian economy for the long term.
It hinted that more rate cuts might be on the way at upcoming meetings, the next of which is scheduled for June 10.
"According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will decrease to 5.0–7.0% in 2023 and return to 4% in 2024," the CBR added, citing the monetary policy stance.
Given that this was the second 300-basis-point cut in a month, William Jackson, Capital Economics' chief emerging markets economist, suggested in a note Thursday that the CBR is unlikely to continue at this pace.
Notably, the language used in Thursday's announcement, which stated that the CBR "holds open the prospect" of further rate cuts, differed from the language used in the scheduled April meeting, which stated that the CBR "sees room" for cuts.
"Even so, 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 ," Jackson said.
By fLEXI tEAM