Elvira Nabiulina, the governor of Russia’s central bank, said on Monday that further interest rate cuts could be needed as the economy adjusts to new international sanctions.
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Russia’s central bankers face the difficult task of balancing consumer stockpiles, supply shocks and projected spending slowdowns as heavy international sanctions try to bring the Russian economy to its knees.
Russia’s inflation reached an annual 16.7% in March, but the central bank cut its key interest rate from 20% to 17% earlier this month as it seeks to mitigate the impact of economic sanctions.
Russia’s central bank governor, Elvira Nabiulina, suggested on Monday that politicians “should be able to cut key interest rates faster,” adding that the central bank would not try to curb inflation by any means, as this would prevent businesses from adapting to a new economic environment.
The CBR more than doubled its key interest rate from 9.5% to 20% in late February, following Russia’s unprovoked invasion of Ukraine as the country’s ruble reached a record low amid a series of international criminal sanctions.
Although monthly inflation reached 7.61% in March, its highest rate since 1999, the central bank appears to have given priority to supporting the economy during the transition period, as Western sanctions, including the freezing of almost half of foreign exchange reserves, CBR, start biting.
Nabiulina said on Monday that the CBR would seek to return inflation to its 4% target in 2024, but the central bank governor said the effects of the sanctions were beginning to shift from the financial markets to the real economy.
The World Bank forecasts that Russia’s GDP will shrink by 11% this year, while the IMF on Tuesday forecasts a shrinkage of 8.5% in 2022 and another 2.3% in 2023. Russian President Vladimir Putin said on Monday that the government may need to increase budget spending to increase liquidity and strengthen the economy.
In a note last week, Goldman Sachs said that current trends in the Russian economy continue, but weekly data show that inflation is slowing slightly.
“Consumer spending continues to slow and PMI in services in particular has weakened significantly and more than manufacturing, quite plausibly because Western companies that have at least temporarily withdrawn from Russia have been more involved in services than manufacturing,” economists said. Goldman Sachs said.
“Inflation is slowing but remaining high at just under 1% a week, disproportionately driven by households that stock up on non-durable goods and drive the purchase of durable consumer goods, fearing supply disruptions caused by future sanctions. According to port data, export activity appears to have increased in the second half of March. “
Last week’s inflation figures are due to be released on Wednesday, but Russian Economy Minister Maxim Reshetnikov told a cabinet meeting Tuesday that he expected “significant slowdowns” in rising consumer prices, according to Reuters.
Along with a shrinking economy, Russia is also facing a major default on its foreign debt, unless it can return to paying the bondholders in dollars, as agreed under the terms of its loans, by the end of the grace period on May 4, according to rating agencies Moody’s and S&P.
Timothy Ash, senior strategist at emerging markets at Bluebay Asset Management, said the 11% contraction predicted by the World Bank would mean a $ 200 billion blow to the Russian economy, but said it would be just the beginning of the economic situation. On the side.
“For Russia, as long as Putin remains in power and because of all the war crimes committed in this war and exposed to the world, Russia will remain an international pariah for years to come,” Ash said.
“It will remain in default on its external debt for years to come, isolated from international capital markets, smoothed out by investment, increasingly cut off from international trade and business – cut by Western energy and raw material supply chains – suffering from recession and stagnation.” falling living standards and increased capital flight and brain drain. “
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