Russia's Central Bank has cut its key interest rate sharply. On Friday, the Central Bank decreased it’s interest rate from 9.5% to 8%, a sharper cut than markets had expected and which it justified by the slowdown in inflation.
With this 150 basis points reduction, the Russian Central Bank has set its key interest rate at a level lower than the rate before Russia’s military offensive against Ukraine at the end of February. In the wake of Western economic sanctions linked to Kremlin’s aggressive war, the country’s central bank had drastically raised its rate from 9.50% to 20%, which has since been lowered in several moves in recent months.
"Consumer price growth rates remain low, contributing to a further slowdown in annual inflation," the Central Bank said in a statement on Friday, justifying its further cut. The bank acknowledged, however, that the "external environment continues to pose challenges to the Russian economy and is severely constraining activity."
The markets were expecting a more modest 50 basis point drop. Year-on-year inflation, which soared in Russia after the Ukraine offensive to a 20-year high, eased in May and June. It still reached 15.9% year-on-year, according to official data. Rising prices have considerably eroded Russians purchasing power, who have little savings, and caused consumption to plummet.
Lowering interest rates is a monetary tool used to boost investment and consumption. The Russian Central Bank said it would "assess the need to reduce the key interest rate in the second half of 2022," estimating that inflation would fluctuate between 12% and 15% in 2022.
