Russia Cuts Key Rate to 15% Delivering Modest Relief to Economy

r7z(wrfswc5omv}uas2g]srp_media_dl_1.png Bloomberg

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(Bloomberg) — The Bank of Russia lowered borrowing costs for the seventh straight time, seeking to support a weakening economy despite risks, including from the Middle East conflict.

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Policymakers cut the benchmark rate by 50 basis points to 15% on Friday, which the majority of economists surveyed by Bloomberg expected. Only one out of nine forecast a smaller, 25 basis-point reduction. 

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“In February, the current price growth slowed significantly as the effects of one-off factors seen at the beginning of the year had faded away,” the central bank said in a statement announcing the decision, adding “uncertainty regarding the external environment has increased considerably.”

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Governor Elvira Nabiullina will hold a briefing at 3 p.m. in Moscow.

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The bank said it assessed underlying, annual inflation to be at about 4%-5%. Annual inflation also eased to 5.8% based on the latest weekly data.

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At the same time, signs of economic strain have been mounting under the weight of high borrowing costs. 

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Russia’s gross domestic product shrank in January. While the Economy Ministry said that was due to technical factors, a measure of business sentiment has continued to decline across nearly all sectors, pointing to a genuine contraction in activity.

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Russia’s economy has been under pressure for months, weighed down by high borrowing costs, sweeping Western sanctions and the impact from the war in Ukraine, now in its fifth year. Added to that is a recent reversal in the ruble after a period of relative strength. Policymakers went into Friday’s meeting facing an even more complex environment than usual as a shock to oil prices from the conflict in the Middle East may change Russia’s budget calculus, but also poses new risks for inflation.

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The Iran war’s impact on Russia is far from straightforward. Disruptions to shipping through the Strait of Hormuz are lifting global prices for a broad range of Russian exports, potentially offsetting risks from the budget deficit.

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Over the longer term, however, economists warn the conflict could push up prices for imports to Russia.

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There could be a global supply shock, increased transportation costs and supply-chain disruptions, as well as imported inflation through higher prices for food, industrial goods and services, said Olga Belenkaya, an analyst at Moscow-based Finam.

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The impact of changes in fiscal policy on price growth remains another key unknown for rate-setters.

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Russia is revising its so-called budget rule, under which shortfalls in oil revenue are covered from rainy-day reserves when the price of exported oil falls below $59 per barrel. Despite a recent spike in energy prices, the threshold is set to be lowered, and corresponding cuts in government spending could follow.

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If the Finance Ministry succeeds in curbing expenditures amid the Kremlin’s ongoing war in Ukraine, it would help temper inflation. Otherwise, the Bank of Russia warned, the pace of rate cuts could slow and monetary policy would remain tighter.

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Nabiullina’s team has voiced concern that tightening the fiscal rule could weaken the ruble over the medium term. So far in March, the once-resilient currency has slid 10% to 84.84 per dollar, its weakest level in about six months, according to Bank of Russia data. 

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The central bank plans to hold its next key rate decision on April 24.

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