Russian macro: key rate cuts likely to continue

RUSSIA ECONOMICS - Report 25 Apr 2022 by Evgeny Gavrilenkov and Alexander Kudrin

The Central Bank is due to hold its regular BoD meeting on April 29, and it is widely assumed that the key rate will be cut – the consensus points to 200 bps. Indeed, there is enough room for the CBR to cut the key rate as the ruble has impressively recovered to the levels seen before February 24. Inflation, which jumped in March, also decelerated much faster than had been expected.

To some extent a similar situation occurred in 2015 – even though certain differences are quite noticeable. At the end of 2014 and in early 2015, oil prices were falling fast, while these days they remain high – even the Urals price, despite its huge discount to Brent. Seven years ago, however, sanctions were not as severe as they are now, and Russia was not yet disconnected from the global financial market. Similar to what happened seven years ago, the CBR is likely to continue a series of rate cuts, and this time it may do it more aggressively. Hence a 200 bps cut is likely on April 29. Of course, the CBR will remain data dependent, as on April 27 Rosstat will publish monthly statistics for March, i.e., the first full month fully reflecting the impact of the military actions in Ukraine. If w-o-w inflation does not decelerate for another consecutive week, then the key rate may be cut less than expected.

The main reason for lowering the policy rate is a threat of a prolonged slowdown in lending activity, as it expanded fast in 2021 and fueled Russia’s economic growth in 2021 and in early 2022 – especially on the consumption side, on the back of a very strong expansion of consumer credit, although corporate lending was also accelerating. If rates stay too high for too long so that consumer lending stops expanding, then debt servicing will suppress consumer demand and may cause a hard landing of overall household consumption.

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