Russia cuts benchmark interest rate by 50 basis points

Russia’s central bank cut its benchmark interest rate by 50 basis points to 7.5 percent on Friday, but warned that it was running out of room to cut borrowing costs further in the coming months.

Friday’s decision is the sixth straight cut since the central bank raised interest rates to a record 20 percent after the all-out Russian invasion of Ukraine in late February.

Inflationary pressures have since subsided, giving policy makers room to cut interest rates significantly. But Central Bank President Elvira Nabiullina said the cycle of slack was coming to an end – and even hinted at the possibility of a rate hike soon, depending on economic factors both domestically and abroad.

With this level of rate, we estimate that we are following a neutral monetary policy. “We are seeing that the forces of one-time deinflation are gradually losing their effect, while the pro-inflationary risks are rising,” Nabiullina said. “The scope of a further reduction in the key rate has been narrowed.”

The latest cut comes at a time of increasing political and economic pressure on Moscow. The country’s budget surplus shrank dramatically over the course of the summer, as tensions between Russia and Ukraine’s Western allies affected oil and gas revenues.

The surplus is likely to turn into a deficit in September, after Moscow’s decision to stop the flow of gas to Europe via the main Nord Stream 1 pipeline. The Kremlin said the tap would remain off until the West lifted sanctions that had affected the maintenance of its equipment.

The central bank warned that the external environment “remains difficult and continues to significantly constrain economic activity.”

At its previous meeting in July, the central bank cut the interest rate by 150 basis points to 8 per cent, but has now said that “business dynamics are better” than it had expected in July.

While price pressures are not as strong as they were in the spring, the report said, “the inflationary expectations of the population and the price expectations of businesses remain at a high level.”

The central bank on Friday forecast inflation of 11 to 13 percent this year, lower than its previous estimate of 12 to 15 percent.

Nabiullina warned that the forces that helped the central bank in recent months, such as the strength of the ruble, the tendency of the population to save and the increase in agricultural production in the summer, are waning.

The bank plans to provide an updated economic forecast in October.

While the bank has improved its inflation forecasts, it expects to only reach its 4 percent target in 2024, with inflation for 2023 estimating between 5 and 7 percent. Its growth outlook has also improved, although the economy is still expected to contract 4-6 percent this year.

Natalia Lavrova, chief economist at BCS Global Markets, expected the bank to become more cautious against the backdrop of the first signs of a reversal in the deflationary trend. “Given the increased inflation risks, more cautious steps or even a pause in monetary easing has become a base case scenario for the coming months,” Lavrova said, indicating that the current rate is very close to the bottom.

Other decisions will be based on economic behavior that shows signs of improvement but remains vulnerable to external threats, Nabiullina said.

“The coal, metals and forestry industries, where restrictions on the supply of the product significantly impede the work of companies, are in the most difficult position,” she said.

These industries have drastically reduced supplies to the West due to sanctions, while reorienting activity east will require new infrastructure and time to build.

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