Central bank says cuts key rate by 1 pp to all-time low of 4.5%

MOSCOW, Jun 19 (PRIME) -- The Russian central bank has reduced the key rate by 1 percentage point to 4.5%, the historical minimum, according to a statement released on Friday.

"Disinflation factors had a stronger than expected effect earlier due to a longer duration of the restrictive measures in Russia and abroad. The influence of short-term pro inflation factors has largely been exhausted. The risks to financial stability connected with the situation on the global financial markets have largely decreased. Inflation expectations of the people and business have fallen. In this context, there is a serious risk of inflation decrease below the 4% goal in 2021," the central bank said.

The authority will consider further key rate decline at the next meetings.

Annual inflation amounted to 3.1% as of June 15. The consumer price dynamics will be additionally limited in the next few months by the ruble strengthening, already seen in May and the beginning of June, over the next several months. At the same time, a low base effect of 2019 will contribute to inflation rise in 2020.

The reduction of gross domestic product (GDP) in April–June can be stronger than expected. Foreign demand fell significantly, which has a stronger effect than the central bank forecasted in April on economic activity. The manufacturing and services sectors’ activity decreased dramatically, new orders slid on the domestic and foreign markets. Unemployment increased, incomes fell, retail plummeted. A gradual recovery is expected as the restrictive measures are lifted in May–June but, according to the surveys, business has a cautious approach.

At the same time, new measures of the government and the central bank will support the economy. In these conditions, the GDP will fall by 4–6% in 2020 and the economy will recover in 2021 and 2022. 

The monetary conditions eased somewhat in May–June after toughening in March–April. The yield of OFZ and corporate bonds fell below those at the start of the year, in part due to the influence of monetary policy. The country risk premium fell as the global financial and commodities markets situation improved. The deposit and mortgage rates decreased, but the loan rates grew, and conditions toughened in some market segments due to growing risks in the producing sector.

The next meeting of the authority is slated for July 24.

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