Russia Slashes Key Interest Rate By 150 Bps

(RTTNews) - Russia's central bank slashed its key interest rate by 150 basis points and signaled further reductions this year as companies need cheaper funding in the face of challenging external environment.

The Board of Directors of Bank of Russia decided to cut the benchmark rate by a sharper-than-expected 150 basis points to 8.00 percent from 9.50 percent. Markets had expected a half percentage point reduction.

After Russia invaded Ukraine in late February, the central bank hiked its interest rate sharply to 20.00 percent from 9.50 percent. Later, the bank slashed the rate by cumulative 1200 basis points.

"The Bank of Russia will consider the necessity of key rate reduction in the second half of 2022," it said in a statement.

The bank expects inflation to slowdown further, from 15.9 percent in June, to 12.0-15.0 percent by the end of 2022. The ruble exchange rate, import substitution and the recovery in imports are the major factors influencing future inflation. Given the current monetary policy stance, inflation is expected edge down to 5.0-7.0 percent in 2023, and return to 4.0 percent in 2024.

The bank said the reduction in the interest rate will increase the availability of credit resources in the economy and limit the decline in economic activity.

The central bank observed that the external environment for the Russian economy remains challenging and significantly constrains economic activity.

The economy is forecast to contract 4.0 percent to 6.0 percent this year. GDP growth is forecast to remain negative next year between -1.0 and -4.0 percent before expanding 1.5 percent to 2.5 percent in 2024.