The Central Bank of Russia has cut the rate: inflation is declining, but problems remain
6 June 14:18
Russia’s central bank has cut its key policy rate for the first time in almost three years, from a record 21% to 20%. The decision was made due to the easing of inflationary pressures and signs that high interest rates are slowing down the economy, "Komersant Ukrainian" reports citing Bloomberg.
“Current inflationary pressures continue to decline. The impact of tight monetary conditions on demand is becoming increasingly apparent,”
– the central bank explained.
Positive inflation dynamics, but concerns about the economy
Bank Governor Elvira Nabiullina has kept interest rates at a record high since October, fighting inflation that was more than twice the 4% target.
The high rate policy has indeed paid off, with consumer price growth slowing to 6.2% y-o-y in April, down from 7.0% in March. According to Renaissance Capital, in May the inflation rate even came close to the 4% target. Annual inflation fell to 9.7%, below the central bank’s forecast of 10.1% at the end of June.
However, the cost of this fight against inflation has been high for the economy. Most industries are already in recession, prompting Economy Minister Maksim Reshetnikov to publicly call for a loosening of monetary policy. He warned that some sectors are cooling excessively and the economy needs to be stimulated to support wartime growth.
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Risks and uncertainty
Despite the positive inflation dynamics, the central bank remains cautious. Regulators doubt whether the slowdown in prices is due to sustainable factors rather than temporary ones. Particularly worrisome is the rise in household inflation expectations, which rose to 13.4% in May for the second month in a row.
The strengthening of the ruble has helped to restrain price growth, but Nabiullina’s team fears that this factor may prove to be unsustainable due to high geopolitical uncertainty. The next rate meeting will take place on July 25, and further decisions will depend on how stable low inflation remains.
A complex equilibrium
The rate cut demonstrates the difficult situation in which Russian monetary policy finds itself: it needs to simultaneously contain inflation and prevent a deep recession. So far, the central bank has been able to balance these tasks, but ongoing geopolitical tensions and military spending pose additional challenges to economic stability.
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