Russia Central Bank Cuts Key Rate Back To 9.50%

Russia's central bank decided for another sharp interest rate reduction on Friday as policymakers shifted its priority to supporting economic growth after the ruble strength lowered inflation.

The Board of Directors of Bank of Russia decided to cut the benchmark rate by 150 basis points to 9.50 percent, taking it back to the level seen before the war with Ukraine began.

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 1050 basis points.

The focus of the central bank has shifted very quickly away from preventing financial stability and inflation risks from taking hold to supporting the recovery and lending, Liam Peach, an economist at Capital Economics, said.

Further reductions are likely to be more gradual from here, but interest rates will fall to 8 percent by year-end, the economist noted.

The board said its monetary policy stance will retain its necessary disinflationary impact to bring inflation back to the target in 2024.

The bank said it will consider the necessity of key rate reduction at its upcoming meetings.

Given the current monetary policy stance, inflation is set to be 14.0 percent -17.0 percent this year, before declining to 5.0-7.0 percent in 2023 and return to 4.0 percent in 2024.

In May, inflation slowed to 17.1 percent from 17.8 percent in April, as a result of strength of the ruble.

According to the board, the actual decrease in economic activity in the second quarter of 2022 is less pronounced than the central bank assumed in its April baseline scenario.