Russia: Central Bank lowers its key interest rate from 14% to 11%


posted on Thursday, May 26, 2022 at 10:26 AM

Russia’s central bank has cut its key key rate from 14% to 11%, mainly to mitigate the effects of the strengthening of the ruble at a time when authorities are facing sanctions for an offensive against Ukraine.

“External conditions for the Russian economy remain difficult, which significantly reduces economic activity,” the monetary institution said in a press release, citing “ruble price dynamics” and “easing inflationary pressures” to explain its decision.

“Risks to financial stability have eased somewhat, allowing capital control measures to be relaxed,” says BCR, which does not rule out further rate cuts in the future.

The next meeting of the institution is scheduled for June 10.

“We doubt that the rate cut will support capital inflows, which are affected by the freezing of financial assets of foreigners in Russia and Russians abroad. However, a lower rate is more appropriate in the current circumstances,” Alfa-Bank estimated in the report. Note.

The reduction of the key rate should, in principle, affect the price of the ruble, as lending becomes less attractive to investors, which weakens the currency.

“The strength of the ruble is a reflection of high oil and energy prices, but especially the decline in imports due to sanctions,” noted Timothy Ash of Bluebay Asset Management.

“This indicates that growth will continue to be disrupted, a deep recession is likely to occur this year. A strong currency will not help and burden oil export revenues that go into the budget.”

Kremlin spokesman Dmitry Peskov said on Wednesday that the government was closely monitoring the situation around the Russian currency.

The latter, which before February 24, the day Russian troops entered Ukraine, hovered around 80 rubles per dollar and 90 rubles per euro, initially weakened considerably before recovering from March 9 and reaching levels at the dollar and 2018 have not been recorded. 2015 for the euro.

Indeed, Russia’s central bank has introduced strict capital controls.

Russia’s currency has also benefited from the fact that a large proportion of foreign companies that are clients of Russian gas giant Gazprom have opened ruble accounts to settle gas purchases, despite warnings from the European Union that the mechanism is circumventing the sanctions imposed on Russia.

On Monday, the Ministry of Finance announced the upcoming reduction in the share of income of Russian exporters, which they had to convert to rubles, from 80% to 50%, which is a sign of easing of foreign exchange control measures imposed by the authorities. prevent the collapse of their national currency.

On Thursday around 11:00 (0800 GMT), ie after the announcement of the BCR, the euro traded at 63.3 rubles, 2.7 rubles more, and the dollar at 60.8 rubles, or 1.54 rubles more than the day before.

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