The Central Bank of Russia (CBR) reduced its borrowing reference rate by 1.5 percentage points to 9.5% and signaled further reductions. Officials have now completely reversed an extraordinary 20% increase in order to tame inflation in the first weeks of the conflict in Ukraine. The CBR said: “Inflation is slowing faster and the decline in economic activity is smaller than the Bank of Russia expected in April.” He said policymakers would “consider the need to reduce the key interest rate at its next meetings”. Inflation in Russia slowed to 17.1% in May, from a two-decade high of 17.8% in April. The CBR forecast that inflation by 2022 overall would average between 14% and 17%. The devaluation of the ruble and the stimulation of the Russian economy hit by sanctions have become top priorities for the Kremlin, which faces the biggest slowdown in GDP of any developed country this year. The ruble is currently trading near a four-year high of $ 58, having recovered quickly due to the introduction of capital controls and higher interest rates from Moscow, as well as the unusual trade surplus triggered by falling exports and high prices. A strong currency risks making Russia’s imports less profitable and also increasing costs. Liam Peach of Capital Economics said: “Strict capital controls and the adjustment to the ruble have helped stabilize Russia since March. “But with the risks of inflation reduced, policymakers no longer seem to want such a strong currency, and a weaker ruble can provide more support to the economy.” He added that “we think the current cut will be followed by less aggressive easing later this year”, predicting that the CBR will cut interest rates to 8% by 2023. Tatiana Orlova of Oxford Economics said the statement was “less crazy” than other recent ones. ING analysts said they would not expect the ruble rally to decline significantly until later in the year, when Western countries begin to severely restrict energy markets.
