Russian Central Bank Rate Cut Three Times Larger than Expected

July 22, 2022

Although economic sanctions had been unsuccessful in many earlier instances, that was the initial NATO response to Russian President Putin’s blatant aggression against Ukraine. The pressure initially seemed to impose great pain on the Russian economy and financial markets. The Central Bank of Russia had previously doubled its key interest rate in 2021 from a record low of 4.25% to 8.50% and engineered a further 100-basis point increase just two weeks before the invasion in February. That was followed by a huge 1,050 hike at the war’s outset to 20.0% and accompanied by capital controls. A tumbling Russian ruble to as low as 143 per dollar fueled inflation additionally, but then the currency started recovering and eventually reversed all those losses and more, which enabled monetary officials to ease back on the monetary brakes. There were two 300-basis point rate cuts in April, another in May and a reduction of 150 basis points to 9.5% in June, completing the full reversal of the 1,050 jump. Analysts were expecting only a 50-basis point cut at today’s scheduled monetary policy review, but officials instead were sufficiently confident about inflation prospects and the ruble’s underpinnings to do another 150 basis points.

The new policy rate level of 8.0% in Russia is the lowest since November and was accompanied by an upbeat statement that declares that GDP has been contracting less sharply than had been expected, observes that indicators of expected Russian inflation are dropping fast and significantly, and predicts more Russian interest rate cuts during the second half of 2022. Inflation is projected to recede to 12-15% late this year, then 5-7% in 2023 and to return to 4% during 2024 by which time growth will be positive. This vindicative news on the economic front was juxtaposed with today’s release of preliminary purchasing manager surveys that show Euroland slip-sliding into recession as the third quarter kicked off. The British, Japanese and Australian PMIs fell to 17-, 4- and 6-month lows.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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