Russian Central Bank Slashed Key Interest Rate to 11% as Inflation Pulls Back From 20-year highs on Rouble Strength

Russia’s Central Bank (CBR) in a fight to arrest the plummeting Russian economy smashed from impacts from the invasion of Ukraine. The CBR has now slashed its key rate by a cumulative 900 basis points since February, the rate was cut to 14% in April, weeks after an emergency rate increase to 20% triggered by Russia’s move to send tens of thousands of troops into Ukraine on Feb. 24 and the Rouble’s collapse. Since than capital controls have seen the rouble become the world’s best-performing currency this year,

The rouble showed limited reaction to the central bank’s move, extending intraday losses and sliding to 60.90 against the dollar, down 2.7% on the day.

“Inflationary pressure eases on the back of the rouble exchange rate dynamics as well as the noticeable decline in inflation expectations of households and businesses,” the bank said in a statement in English.

The CBR said it “holds open the prospect of key rate reduction at its upcoming meetings.” The central bank said external conditions for the Russian economy are still challenging but financial stability risks have somewhat decreased, opening room for easing of some capital control measures.

The rouble’s performance has “given policymakers room to reverse emergency measures introduced since February,” adding “We suspect that the CBR won’t continue this pace of easing… A further easing of capital controls and additional rate cuts seem likely,” Capital Economics analysts said in a note.

The central bank could cut its key rate further by 50-100 basis points at the next rate-setting meeting scheduled for June 10, said Dmitry Polevoy, head of investment at LockoInvest firm.

Russia Default Risk

 “Russia will service its dollar debt in rubles after the expiry of a sanctions loophole closed the option of payments in the US currency, potentially putting Moscow on track to default. The announcement came a day after the US confirmed the end of the waiver, creating another headache for Russia as it tries to get funds to investors. A payment in rubles would breach the terms on a 2026-dollar bond with coupons due this Friday, triggering a 30-day grace period before Russia could potentially slip into default.” May 25 – Bloomberg

Inflation

Inflation slowed to 17.51% as of May 20 from 17.69% a week earlier in Russia amid a decline in consumer activity, the economy ministry said, but hovered near its highest since early 2002. On Wednesday, President Vladimir Putin ordered 10% rises in pensions and the minimum wage to cushion Russians from inflation.

The central bank did not mention its 2022 inflation forecast, which previously stood at 18-23%, but said inflation will slow to 5-7% in 2023 before reaching its 4% target in 2024.

Inflation slowed to 17.51% as of May 20 from 17.69% a week earlier amid a decline in consumer activity, the economy ministry said, but hovered near its highest since early 2002.

Governor Elvira Nabiullina is due to speak at a banking conference in Moscow later in the day where she may shed more light on her bank’s plans.

Russia’s declaration of war on Ukraine has ravaged both countries finances and people with severe consequences for both countries the result of Russian President’s Putin’s actions. S&P lowered Russia’s long-term foreign currency credit rating to ‘BB+’ from ‘BBB-‘. The agency warned it could lower ratings further, after getting more clarity on the macroeconomic repercussions of the sanctions.

Moody’s said its decision factors in the scale of the conflict and the severity of additional Western sanctions, which have already hit some of Russia’s top banks, military exports and members of President Vladimir Putin’s inner circle.  The degree to which Russia’s substantial currency reserves are able to mitigate the disruption stemming from the new sanctions and lengthy conflict will be part of the equation.

Russia has been shoring up its finances with Russia’s central bank been adding billions to its banking sector with billions in additional foreign exchange and Rouble liquidity. Putin’s government has pledged full-scale support to sanctions-hit companies.

Russia was cut to junk by Moody’s and S&P in early 2015 after the annexation of Crimea and the plunging oil prices caused a Rouble currency crisis.

Source: S&P, Moody’s, Fitch

From The TradersCommunity US Research Desk