Russia’s central bank on Friday slashed its key interest rate by three percentage points to a still-high 17 percent, justifying the move by saying that risks to financial stability had softened as emergency measures brought deposits back to banks and helped quell inflationary pressures.
The 300 basis point drop will go into effect on April 11, the central bank said in a statement, in which it teased more rate cuts if Russia’s economy were to show further signs of improvement.
“External conditions for the Russian economy are still challenging, considerably constraining economic activity,” the central bank said, adding that financial stability risks are still present, though these have “ceased to increase for the time being, including owing to the adopted capital control measures.”
Rising From ‘Rubble’
Crippling Western sanctions imposed in the wake of Moscow’s invasion of Ukraine in late February sent Russia’s currency plunging to a record low against the dollar, prompting President Joe Biden to say the ruble had been reduced to “rubble.”
Yet the ruble has since mounted an extraordinary comeback, basically recovering all lost ground as foreigners continued to buy Russian energy and Moscow rolled out a series of emergency measures to stem the bleeding.
Reacting to the sanctions, Russia’s central bank more than doubled the key interest rate to 20 percent, which discouraged Russians from rushing to withdraw their savings and so prevented economically damaging bank runs.
Russian exporters were forced to convert 80 percent of their hard currency profits into the ruble, while assets held by nonresident investors were frozen, preventing selloffs that would have pushed Russia’s currency lower.
Russians have also been prohibited from withdrawing more than $10,000 of foreign currency from their accounts, the central bank said it would start buying Russian government bonds, and Russia’s President Vladimir Putin ordered “unfriendly” countries to pay for Russian energy in rubles.
Official Exchange Rate Not ‘Terribly Relevant’
While the ruble’s quick rebound has delivered a PR victory to Putin, who has downplayed the impact of sanctions, Treasury Secretary Janet Yellen recently urged lawmakers in Congress not to read too much into the Russian currency’s recovery.
Yellen said that the market for rubles has become so distorted by the actions of the Russian government and its central bank to limit capital outflows that “you should not infer anything” from the value of the ruble.
Analysts, too, have said that the strict capital controls rolled out by Russia mean the ruble’s exchange rate is painting a distorted picture.
“Guys, with capital controls, I can fix the currency at about any rate I want to,” economist Daniela Gabor said in a tweet Wednesday.
Iikka Korhonen, the Bank of Finland’s Russia expert, told Politico that the ruble’s rebound is not a reflection of economic fundamentals, but draconian emergency measures.
“The ruble is not a freely convertible currency anymore,” he told the outlet. “So the official exchange rate isn’t terribly relevant.”
While the ruble has basically managed to mount a near-complete recovery to where it was prior to the invasion, Russia’s central bank acknowledged that the economy is not yet out of the woods.
The central bank said inflation would continue to rise due to the base effect, though it said the ruble’s recovery has helped constrain inflationary pressures.
Data shows a “noticeable slowdown” in the pace of inflation, the central bank said, adding that there’s been a steady inflow of funds to fixed-term deposits.
Some analysts said the move to cut rates is a sign of confidence on the part of Russia’s central bank that the emergency measures are working.
Dmitry Polevoy, head of investment at the Moscow-based brokerage Locko-Invest, told Reuters that he expects another rate cut of 1-2 percent in April, though this “will require additional positive dynamics on inflation and inflationary expectations.”
Annual inflation in Russia accelerated to 16.70 percent as of April 1, its highest since March 2015 and up from 15.66 percent a week earlier.
Polevoy said he has improved his year-end key interest rate forecast to 11-12 percent from an earlier expected ceiling of 15 percent.
While the emergency measures have had a cooling impact on inflation, economists polled by Reuters expect inflation in Russia to accelerate to 23.7 percent this year, the highest level since 1999.