Russia’s central bank cut its benchmark rate by 50 basis points to 7.5 per cent on Friday, but warned that it was running out of room to cut borrowing costs further in the months ahead.
Friday’s decision is the sixth consecutive cut since the central bank raised rates to a record 20 per cent following Russia’s full-scale invasion of Ukraine in late February.
Inflationary pressures have weakened since then, offering policymakers the space to cut rates drastically. But central bank head Elvira Nabiullina said the cycle of loosening was coming to an end — and even hinted at the possibility of a rate rise soon, depending on the economic factors domestically and externally.
“With this rate level we estimate that we are in a neutral monetary policy. We see that one-off disinflationary forces are gradually losing their effect, while pro-inflationary risks are rising,” Nabiullina said. “The scope for further reduction in the key rate has narrowed.”
The latest cut comes at a time of mounting political and economic pressures on Moscow. The country’s budget surplus has narrowed substantially over the course of the summer, as tensions between Russia and Ukraine’s western allies hit revenues from oil and gas.
The surplus is likely to turn into a deficit in September, following Moscow’s decision to halt gas flows to Europe through the key Nord Stream 1 pipeline. The Kremlin has said the tap will remain off until the west lifts sanctions that have affected its equipment maintenance.
The central bank has warned that the external environment “remains challenging and continues to significantly constrain economic activity”.
In its preceding meeting in July, the central bank cut the rate by 150bp to 8 per cent but has now said “business activity dynamics are better” than it had expected in July.
While price pressures are not as strong as in the spring, it said “inflationary expectations of the population and price expectations of enterprises remain at an elevated level”.
The central bank on Friday forecast inflation at between 11 and 13 per cent this year, below its earlier estimate of 12 to 15 per cent.
The forces that had aided the central bank in recent months, such as the stronger rouble, the population’s inclination to save and increased agricultural production in the summer were diminishing, Nabiullina warned.
The bank plans to present an updated economic forecast in October.
While the bank has improved its inflation forecast, it expects to only reach its goal of 4 per cent in 2024, with inflation for 2023 estimated at between 5 and 7 per cent. Its growth forecast also improved, though the economy is still expected to shrink by between 4 and 6 per cent this year.
Natalia Lavrova, senior economist at BCS Global Markets, expected the bank to become more cautious on the back of the first signs of a reversal in the deflationary trend. “Given the increase in inflationary risks, more cautious steps or even a pause in the monetary easing is becoming a base case scenario for the coming months,” Lavrova said, suggesting the current rate is very close to the bottom.
Nabiullina said further decisions would be based on economic behaviour, which was showing signs of improvement but was still prone to external threats.
“The coal, metals and forestry industries, where restrictions on supplies of the product are significantly obstructing the work of companies, are in the most difficult position,” she said.
Those industries have significantly reduced supplies to the west due to sanctions, while reorienting activity eastward requires new infrastructure and time to build it.