Russia Central Bank slashes interest rates

RUSSIA’S central bank slashed interest rates sharply Thursday in an effort to reduce the value of the ruble, which has soared against the dollar in recent weeks.

The Central Bank of Russia (CBR) cut the benchmark rate to 11 percent, from 14 percent previously, in an emergency meeting called two weeks early. It was the third rate cut in just over a month.

The ruble was little changed after the central bank’s rate hike, and was last 0.25 percent lower at 60.37 to the dollar.

Russia’s military operations in Ukraine in late February sparked a plunge in the ruble from around 76 to the dollar to 140 as the war shook Moscow’s financial markets.

But the government quickly put in place strict capital controls and the central bank more than doubled interest rates to 20 percent, in a move designed to encourage savers to keep their rubles in bank accounts.

Increased revenues from oil and gas exports have also helped the currency, which hit a high of around 55 to the dollar earlier this week.

Russia’s government has recently started talking of the strong ruble as a problem for exporters. It could also pose difficulties for the budget, because the government takes some energy taxes in foreign currency which must then be converted.

The CBR said Thursday it was open to cutting interest rates further at future meetings. The next decision is due 10 June.

Russian President Vladimir Putin has heralded the strong ruble as a sign that the economy is successfully weathering Western sanctions.

But the CBR said Thursday: “External conditions for the Russian economy are still challenging, considerably constraining economic activity.” It added that bank lending is still weak.

However, the central bank was emboldened to cut rates by signs of a slowdown in inflation, which has spiked since the invasion of Ukraine.

It said annual inflation slowed to 17.5 percent in May from 17.8 percent in April, in part because a stronger ruble has made imports cheaper.

The central bank predicted annual inflation will fall to between 5 percent and 7 percent in 2023 and to 4 percent in 2024.

Economists at Dutch bank ING said Thursday they think the Russian economy will shrink by a dramatic 10 percent to 15 percent this year—Market Insider