Russia cuts interest rates as economy recovers from war in Ukraine

Russia’s central bank on Friday announced a second key rate cut this month in a bid to prop up an economy battered by war in Ukraine and Western sanctions.

The Bank of Russia lowered its benchmark rate from 17% to 14%, after already cutting borrowing costs by 20% on April 8. Policymakers, led by central bank chief Elvira Nabiullina, doubled the key rate at an emergency meeting on February 2. 28 as they rushed to support the ruble after Western governments froze nearly half of the country’s foreign exchange reserves.

The central bank has imposed capital controls that prevent Russians from taking their money out of the country and has required the country’s exporters to convert most of their foreign currency earnings into rubles.


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These measures have helped to strengthen the ruble and the central bank said on Friday that it had helped to slow the rise in consumer prices, which had surged in the weeks immediately following the invasion.

But the central bank has also said Western sanctions will inflict significant economic damage this year and predicts a fall in the country’s gross domestic product of between 8% and 10%, which is in line with the latest assessment from the International Monetary Fund.

“Economic activity is in decline,” Ms Nabiullina told reporters. “The end of long-term economic relations will have a negative impact.”

The campaign to financially isolate Russia during the war in Ukraine blacklisted most of Russia’s largest banks. Western sanctions have also severed many of Russia’s ties to international logistics networks and made it difficult for companies to source needed parts.

The consequences of the harsh economic sanctions against Russia are already being felt around the world. The WSJ’s Greg Ip joins other experts in explaining the significance of what has happened so far and how the conflict could transform the global economy. Photo illustration: Alexandre Hotz

“The question is how long these difficulties will persist and how quickly companies can find new suppliers and replace missing links in the production chain,” said Ms Nabiullina.

Although the reversal in the trend of the ruble has contributed to slowing the rise in prices in recent weeks, the central bank still expects the inflation rate to increase in the coming months and average between 18% and 23% this year.

With the ruble stabilizing, shortages of goods and services previously provided by foreign companies that pulled out of the country, or were imported, are the main driver of higher prices.

Ms Nabiullina pointed to shutdowns in the automotive industry, where foreign companies such as Renault HER

were large manufacturers, as an example of a general trend in which the supply of many goods and services fell more sharply than demand, pushing prices up.

This price hike dashed the hopes of many Russians.

“Visions of replacing the car will remain a dream forever,” said Tatyana Ivanova, who works in online sales in St. Petersburg. “It just can’t cost that much.”

The central bank’s forecast and Ms. Nabiullina’s comments at a news conference following the rate cut are the most comprehensive view of the economic outlook offered by Russian officials since the February invasion.

In response to the sanctions, the Russian government wants to make its economy more self-sufficient and is also looking for alternative sources for the sophisticated electronics it can no longer buy from Western suppliers.

Ms Nabiullina said the recent cuts in the key interest rate were partly aimed at helping companies as they invest to replace imported goods with their own products.

The central banker said that while keeping inflation low remains a key objective, clamping down on inflation too hard by keeping interest rates very high would significantly weaken demand and give companies little incentive to do the investments needed to replace imports.

“We don’t intend to bring inflation back to target quickly,” she said. “Squeezing demand would hamper the structural transformation of the economy.

This focus on supporting investment marks a slight shift in focus for the central bank, which, under Ms Nabiullina, has been staunchly committed to keeping inflation low and providing little relief. pay attention to supporting growth.

Developing local alternatives to foreign products will take time and may never replace all that the international economy once provided.

Maria Kozlova, a 33-year-old human resources worker in St Petersburg, said she had replaced some of the foreign products like face cream with cheaper Russian alternatives. But she paid double online for Italian pet food that doesn’t trigger allergies for her cat.

“We bought the biggest package,” she said. “You can substitute everything else,” but not the cat food, she added.

Write to Paul Hannon at [email protected] and Yuliya Chernova at [email protected]

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