The Russian Central Bank Dropped Interest Rate To 17%

On Friday, the Russian central bank slashed its benchmark rate to 17% and suggested more cuts were conceivable, citing emergency measures as having contained the risk to financial stability, returned deposits to banks, and helped reduce the threat of inflation.

Following a dramatic emergency boost in February, the central bank retained its benchmark interest rate at 20% and announced it would begin buying OFZ government bonds, warning of an impending spike in inflation and oncoming economic collapse. On February 24, Russia dispatched troops into Ukraine as part of a “special military operation” to demilitarize and “denazify” the country, provoking massive Western sanctions.

The central bank dropped the benchmark rate by 300 basis points unexpectedly on Friday, making the move ahead of its next regular meeting on April 29. It said the decision reflected a shift in the risk balance between a faster consumer price increase and a drop in economic activity, as well as a reduction in the risk to financial stability.

War and Inflatio

Annual inflation in Russia rose to 16.70 percent on April 1, the highest level since March 2015 and up from 15.66 percent a week earlier, as the volatile rouble drove up prices amid unprecedented Western sanctions that cut Russia off from global financial markets and limited its trade with the rest of the world. The central bank indicated that external circumstances for the Russian economy remained difficult and were “considerably restricting economic activity,” but that it “remains open to the likelihood of further key rate reductions at its forthcoming sessions.” The central bank also stated that inflation will continue to climb due to the base effect, even though the last weekly data showed a decrease in price growth, owing to the rouble’s gain.

Russian analysts praised the central bank’s decision to drop the key rate ahead of schedule, which some had anticipated happening only in June, saying it demonstrated confidence in the emergency measures enacted on February 24. “The rate is expected to be dropped by another 100-200 basis points in April,” said Dmitry Polevoy, head of investment at Moscow-based brokerage Locko-Invest.