Russia’s central bank cut base interest and indicated further cuts

Russia’s central bank cut its key interest rate by three percentage points to 14 percent on Friday. The decline in interest rates is higher than analysts expected. The bank also said it saw room for further rate cuts in an effort to cope with the economic downturn and high inflation.

The central bank unexpectedly cut its key interest rate by three percentage points in April. At the end of February, just days after the Russian invasion of Ukraine, interest rates more than doubled to 20 percent.

Analysts in a Reuters poll expected the central bank to cut the key interest rate to 15 percent on Friday. Economists assumed that Russia would need lower rates given the impending economic recession and the impact of sanctions imposed on Moscow by the West for its aggression against its neighbor.

Lower interest rates support the economy through cheaper loans. But they can also boost inflation and make the ruble more vulnerable to external shocks. Inflation, which is approaching its 20-year high, must now be curbed by the central bank while supporting the economy in the sharpest decline since the collapse of the Soviet Union in 1991.

“If the situation develops in line with the base forecast, the Russian central bank sees room for a reduction in the base interest rate in 2022,” the statement said. Analysts expect the central bank to cut interest rates to 10.5 percent by the end of the year, as the fall in the ruble helps it reduce inflationary risks.

The bank also announced on Friday that, according to its forecast, inflation could accelerate to 18 to 23 percent this year. High inflation lowers living standards and has been a major concern for consumers for several years. According to the bank, gross domestic product (GDP) will fall by eight to ten percent this year.

The next meeting of the central bank, which will decide on monetary policy, including interest rates, is scheduled for June 10.