Having reduced the key rate immediately by 3 p.p. to 11%, the Bank of Russia decided to take another aggressive step. Pavel Biryukov, an economist at Gazprombank, told Izvestiya on Thursday, May 26.
At an extraordinary meeting on Thursday morning, the Central Bank lowered its key rate to 11%. He also allowed further declines at the next meetings. The next one is scheduled for June 10th. The Central Bank also noted that inflation is slowing down faster than its forecast of April 19 suggested – then the regulator raised the inflation forecast in Russia for this year to 18-23%. At the same time, the head of the Central Bank, Elvira Nabiullina, noted that inflationary pressure in the country had stabilized over the past two weeks.
In the current conditions of the rapid strengthening of the ruble, the stabilization of inflationary expectations and a sharp decline in weekly inflation rates, the Central Bank has less and less reason to adhere to a conservative monetary policy, Biryukov believes.
“Given these factors, we expect a further reduction in the key rate to 9% by the end of the year. The speed of this decline will directly depend on the dynamics of consumption and the state of foreign trade: the speed of recovery of import supplies will most likely be a decisive element,” the economist said.
Mikhail Vasiliev, chief analyst at Sovcombank, told Izvestia that a sharp easing of the Central Bank’s monetary policy is also supported by a decline in lending and economic activity in the country.
He noted that since the last meeting of the Central Bank on April 29, the ruble has strengthened against the dollar by 21%, from 71 to 56 RUB/USD. A stronger ruble is helping to lower the cost of imported goods and slow inflation, which has returned to seasonal levels in the past two weeks, the analyst added. Rosstat reported that weekly inflation slowed to 0.05% by May 13 from 0.12% a week earlier. Weekly deflation is not ruled out in the coming weeks, Vasiliev believes.
At the same time, the strengthening of the ruble is unprofitable for the budget of the Russian Federation and exporters, the analyst emphasized. He recalled that at the beginning of this week, the Ministry of Economic Development reported that “now the strengthening of the ruble is at peak levels” and further adaptation of the exchange rate to new economic realities should be facilitated by a reduction in the key rate of the Central Bank.
Vasilyev admitted that the Bank of Russia would leave a signal about the possibility of further reduction of the key rate this year and by the end of the year the rate could drop to 9-10% per annum.
On April 29, the Central Bank lowered the key rate from 17% to 14% per annum. Then the regulator noted that the risks to price and financial stability had ceased to grow, which created conditions for a decline.