Russia’s central bank cut lending rates sharply on Friday, belatedly joining the global easing trend in an attempt to limit the economic hit from coronavirus, despite the pressure it will put on inflation and the country’s currency.
The global slowdown and collapse in oil prices sparked by the Covid-19 pandemic has placed the bank in a bind, caught between wanting to limit the scale of Russia’s economic contraction but also temper inflation and prop up the rouble.
The bank cut its key rate by 50 basis points to 5.5 per cent and suggested more cuts could follow, as it forecast Russia’s economy would contract by between 4 and 6 per cent this year because of both the collapse in demand for the country’s raw materials and quarantine measures that have stifled domestic business. It had held rates steady last month, even as other big central banks eased lending costs.
Elvira Nabiullina, the central bank’s governor, said its directors had “completely revised our views on economic development and inflation for the next three years” and said further rate cuts were likely.
“This means a shift to an accommodative monetary policy,” she said. “Right now timely [and] even pre-emptive measures are all the more important to limit negative economic trends and create the conditions for a more rapid normalisation of the economic situation once [movement] limits are removed.”
Natalia Orlova, chief economist at Alfa-Bank, said Ms Nabiullina’s pessimistic outlook “would justify continuing with rate cuts should it be necessary, [and] allow [Ms Nabiullina] to confirm the effectiveness of central bank action in case actual GDP growth should [be] better” than it had predicted.
The rate cut, which was deeper than usual, was widely expected and takes the benchmark one-week repo rate to its lowest level since March 2014, before Moscow’s invasion of Crimea. The double bind of western sanctions and an oil price slump led to a collapse in the rouble and a brief recession.
Russian president Vladimir Putin said on Friday that the coronavirus crisis was “worse than the situation [during the global financial crisis] in 2008-2009”, but has been reluctant to offer more than limited fiscal support.
Moscow has promised a far smaller stimulus than other European countries, as the collapse in the oil price forces the government to spend its financial reserves on filling the resulting hole in its budget revenues instead.
The central bank expects oil prices to average $27 a barrel this year, only approaching the $42 per barrel Russia’s budget needs to break even in 2022, and said the budget deficit could be as large as 6 per cent of gross domestic product this year.
Ms Nabiullina said on Friday that the central bank had spent only $5.5bn of reserves since March to prop up budgetary spending, nearly half of which came as part of a deal to transfer the ownership of state lender Sberbank and to fund government programmes that were planned before the crisis.
With oil prices at two-decade lows, economic policy officials are scrambling to find ways to mitigate the impact of the slowdown on Russia’s economy without taking on additional spending. Most of the current Rbs2tn rescue package — which, at 2.8 per cent of GDP, is several times smaller than those in many western countries — comes from tax holidays and loan guarantees rather than direct stimulus. Officials are also reluctant to tap a $165bn national wealth fund for immediate relief payments, preferring instead to use it to support future budget expenditure.
One possible solution suggested to Mr Putin by Andrei Kostin, chief executive of state-run VTB Bank, on Thursday would see the state increase its domestic borrowing programme by selling bonds to banks to finance more government spending.
“We assume that further measures to support the economy may be taken,” Ms Nabiullina said. “This will enable the consequences of lockdown measures for the public to be eased, help economic activity return to normal more quickly, and lower the risk of inflation deviating below the target in upcoming quarters.”
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Analysts have warned that cutting rates could push up inflation and increase pressure on the rouble, which has fallen 20 per cent this year. A weaker currency typically fuels rising inflation in Russia by increasing the cost of imported goods.
Scarred by huge price shocks in the 1990s, Russian policymakers are particularly wary of inflationary pressure. Inflation ticked up to 3.1 per cent this month from 2.5 per cent in March, and the central bank said it expected it to rise to between 3.8 and 4.8 per cent this year.
“If inflation goes above 4 per cent under current price growth dynamics by the June rates decision, or if the rouble weakens closer to 80 to the dollar, or if data shows a demand recovery once quarantine measures are eased in the second half of May, then the next step could be smaller or we could even see a pause [in rate cuts],” said Sofya Donets, chief Russia economist at Renaissance Capital.
Source: Financial Times