Russia’s Central Bank has cut its key interest rate to 4.25% in its latest move to help get the Russian economy firing after the coronavirus pandemic.
The latest cut — from 4.5% — sets a new record low for Russia’s interest rates, and is the third consecutive downwards move from the Central Bank since it started cutting rates in mid-April in response to the economic impact of the pandemic.
Markets expected a cut, though analysts were split between whether the Central Bank would cut by 25 or 50 basis points. The bank stuck to the more cautious approach, but in a statement signalled more rate cuts were likely to come, possibly at its next meeting in September. Most forecasts predict the bank will take rates down to 4% by the end of the year.
Inflation is currently running at 3.2% — well below the Central Bank’s target rate of 4%. While cuts are unlikely to help restore inflation toward the bank’s target this year, VTB Capital analyst Alexander Isakov said in a research note before the decision was published that further downwards moves signal the bank is also worried inflation could undershoot in 2021 amid a weak economic recovery.
“The recovery of the global and Russian economies will be gradual despite the fact that the easing of restrictions revives economic activity,” the Central Bank said in a statement. “In these circumstances, there is a risk that in 2021 inflation might deviate downwards from the 4% target.”
The bank also updated its macroeconomic forecasts. It expects Russia’s GDP to decline by 4.5-5.5% in 2020, followed by an expansion of 3.5-4.5% next year.
Governor Elvira Nabiullina will add more details on the Central Bank’s outlook for the economy at a press conference in Moscow later on Friday afternoon. Markets are particularly focused on her assessment of the so-called neutral rate — an interest rate which does not have any impact on inflation.
The bank previously believed the neutral rate was 6%, but analysts believe it might now put the rate somewhere closer to 5%. A lower assessment of the neutral rate from the Central Bank would be a strong signal to the markets that it expects interest rates to stay near these historic lows for longer as Russia and the global economy emerge from the crisis.