In an extraordinary meeting, the Russian central bank cut interest rates from 14% to 11% and said further cuts could follow. The rate was raised to 20% shortly after Russia’s invasion of Ukraine in February as the bank sought to block Western sanctions from causing a financial crisis.
Russia’s central bank said in a statement that inflationary pressures were easing due to the dynamics of the ruble’s exchange rate, as well as the significant fall in family and business inflation expectations. It said it would bring inflation down to 5% to 7% this year, down from about 17.5% this month.
Western efforts to reduce Russian energy imports have been slow, and rising oil and gas prices have boosted the Kremlin’s coffers.
William Jackson, chief emerging market economist at Capital Economics, said in a research note that “the key issue is that higher oil and gas revenues are providing policymakers with a lifeline, allowing them to push back urgent economic measures.”
“Against that background, there is potential for further simplification of capital controls and reduction of additional rates,” he added.
Russian President Vladimir Putin has spent years trying to build a “fortified economy” to move forward with the war, which could be deployed in an emergency. On Wednesday, he announced a 10% increase in pensions and a minimum wage to protect Russians from the effects of inflation.
But Russia’s economy is not in a strong position. Capital controls and emergency reserves can only last so long. And the new US sanctions mean Russia could soon default on its foreign debt for the first time in more than a century.
Timothy Ash, a senior emerging market strategist at Asset Management in Blue, says Putin now needs to deploy those emergency buffers, and that rate cuts were part of a public relations campaign.
“They are in an information war with the West, part of the ruble,” he told CNN Business.
A deep recession is coming this year. The International Monetary Fund expects Russian GDP to shrink by 8.5% as a result of the tough sanctions imposed on Moscow.
Still, those sanctions have not yet hit Russia’s fossil fuel resources hard. Moscow is making it difficult to sell its oil and coal, but its biggest energy consumer – the European Union – has yet to agree on an oil embargo and a direct embargo on Russian natural gas imports is not on the table.
Russia is now cutting its oil production forecast for this year. Deputy Prime Minister Alexander Novak said oil production could fall between 480 million and 500 million tonnes, down from about 6.5% in 2021, the state news agency RIA reported Thursday. Russia’s economy ministry has previously forecast a 9.3% decline this year.
“I think the contraction will be much smaller,” Novak was quoted as saying during a visit to Iran. “There was only one month with a contraction of more than 1 million barrels per day, which is not so far deep. So, I think there will be a recovery in the future,” he added.
While many Western traders and refineries are moving away from Russian oil and coal, India and China are moving toward some relaxation.
– Reuters contributed to this article.