Russia Signals Big Rate Cuts After Easing to Six-Year Low

(Bloomberg) -- Bank of Russia Governor Elvira Nabiullina said another percentage point of interest rate cuts is possible as the economy heads into its worst economic slump in more than a decade.

“Given the extraordinary development of events, adjusting monetary policy in small steps as we are used to may not be enough,” Nabiullina said after the central bank cut by 50 basis points Friday. “Decisive steps may be needed to bring inflation back to its goal and stabilize the economy.”

The benchmark interest rate was cut to 5.5%, the lowest level since before Russia’s 2014 annexation of Crimea. The ruble rallied with government bonds.

The bank forecast an economic contraction of 4% to 6% this year and said prices for Russia’s Urals blend of oil could average $27 a barrel, about half what was previously expected. A budget deficit could reach 6% of gross domestic product this year, Nabiullina said.

The dovish turn is “a clear indication that the priority for the central bank is to prevent the upcoming recession from transforming into depression,” said Piotr Matys, a strategist at Rabobank in London.

Russian policy makers have drawn criticism for not providing enough stimulus to cushion the double blow from coronavirus and a historic drop in oil prices. The International Monetary Fund forecast last week that the economy could slump more than 5% this year, double the global rate, and the recovery next year will be smaller.

Russia joins other emerging-market central banks in stepping up monetary easing as output slumps across the globe. Mexico also reduced rates by 50 basis points this week, while South Africa, Turkey and Peru have all cut by 1 percentage point this month.

What Our Economists Say:

“More easing is on the way, in spite of the cautious tone of the guidance. The bleak outlook for the economy will require at least another 50 basis points of reductions.”
--Scott Johnson, Bloomberg Economics

Annual inflation accelerated to 3.1% as of April 20 and may reach 4.8% this year, the bank said. It was at 2.5% in March.

Rate cuts are good news for bond investors who have been creeping back into Russian government debt following a $2 billion exodus last month. The Finance Ministry needs stronger demand so it can ramp up borrowing to fund stimulus measures.

“The main surprise for me was the depth of contraction the central bank is seeing, that is in favor of further easing,” said Sofya Donets, an economist at Renaissance Capital in Moscow. “We may see the key rate at 5% in June.”

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