Russia’s central bank on Friday announced a 1.0-per centage-point cut to its key interest rate, taking it to 4.5 per cent, the lowest level in recent decades, in a bid to revive the economy after the virus shutdown.
A global slump in demand during months of lockdown measures triggered by the coronavirus epidemic led to ‘more profound than expected’ disinflationary factors, the bank said in a statement.
The bank has abided by a conservative monetary policy for years, targeting four per cent inflation, but said on Friday that the rate decision was taken because this figure may dip ‘significantly’ below the target next year.
It said the negative effect of the economic lockdown has been ‘more extended’ than previously assumed, hitting investment and incomes and increasing unemployment.
‘The influence of the weaker ruble and the episodes of increased demand for certain product groups in March has been exhausted,’ it said.
It said that further cuts would be considered, based on inflation dynamics, economic activity and domestic and global market risks.
The bank predicted that the contraction of the economy in the second quarter ‘could prove more sizeable than expected’, after growth of 1.6 per cent in the first quarter.
It predicted the GDP for the year 2020 would shrink by 4 to 6 per cent. The new key rate is the lowest in recent history, below the previous record of five per cent in June 2010.
‘This is quite a change relative to previous 5 years of quite conservative monetary policy,’ said Renaissance Capital’s chief economist Sofiya Donets. ‘So it could clearly affect both borrowing and savings in the economy,’ she told AFP, adding she expects a return to a more neutral policy next year.
‘The rate of 5 per cent or below would indeed be the lowest over this century,’ said Dmitry Polevoy, chief economist at the Russian Direct Investment Fund.
‘With downside risks to inflation outlook, strong ruble and recessionary economic environment there is clearly room to enter this uncharted territory of lower policy rate to fuel the just-started economic recovery,’ he told AFP.
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