Russia cut interest rates on Thursday as a resurgent ruble – backed by strong oil and gas revenues – dampens some of the heat from inflation.
Russia’s Central Bank cut interest rates from 14% to 11%, after inflation slowed to 17.5% in May from 17.8% in April, the bank said, which now expects the Annual inflation will decrease to 5-7% in 2023 and return to 4% in 2024.
The bank raised interest rates to 20% as the Russian economy was hit by Western sanctions, but the latest move means they are now almost the same as before the invasion of Ukraine, when they amounted to 9.5%.
“The external conditions of the Russian economy are still difficult, significantly limiting economic activity,” the bank said. “Risks to financial stability have diminished somewhat, allowing some relaxation of some capital control measures.”
Reacting to the decision, William Jackson, chief emerging markets economist at Capital Economics, said further rate cuts and an easing of capital controls look likely.
“The key point is that high oil and gas revenues provide policymakers with a lifeline, allowing them to reverse emergency economic measures,” Jackson said.
On Monday, Russian President Vladimir Putin said the economy was “resisting the impact of sanctions” despite a bleak outlook.
“Despite all the difficulties, the Russian economy is resisting the impact of sanctions quite well,” Putin said during a meeting with Belarusian President Alexander Lukashenko in the Black Sea resort city of Sochi.
“Yes, it is not easy. Everything that is happening requires special attention from the economic bloc of the government. Overall, these efforts are having a positive effect,” Putin said.
A bit of context: In late April, Russia’s Central Bank said Russia’s economy is expected to contract by 8-10% in 2022, noting a decline in economic activity in March after international sanctions were imposed on Russia.
At the beginning of the same month, the World Bank predicted that Russian GDP would shrink by 11.2% in 2022.
Western sanctions imposed following Russia’s invasion of Ukraine are making life difficult in the Kremlin, but they are also affecting the global economy.
“Russia’s invasion of Ukraine has worsened the Covid-19 pandemic – crisis after crisis – devastating lives, stunting growth and driving up inflation,” according to an International Monetary Fund blog published on Monday.