Russia’s central bank cut its benchmark rate to a new record low on Friday as a national lockdown imposed in response to the coronavirus pandemic continued to weigh on its economy.
The 25-basis-point cut took its benchmark lending rate to a post-Soviet low of 4.25 per cent. The decision came after the World Bank forecast that the Russian economy would suffer a 6 per cent fall in gross domestic product this year.
The move is the fourth time this year the central bank has cut its key rate, which started 2020 at 6.25 per cent. Central bank governor Elvira Nabiullina said Russia would probably continue to cut rates throughout 2020.
“We assume that such potential remains . . . There are a lot of uncertainties for now,” she said.
Russia imposed sweeping quarantine measures in March in a bid to stem its rapidly rising cases of Covid-19. That caused manufacturing output to shrink by the largest amount on record and hit domestic demand hard, while at the same time the price of oil — its key export — plunged 40 per cent.
The Kremlin moved to lift the national lockdown in mid-May but many parts of the country are still operating under restrictions, while some industries are yet to fully return to normal.
Ms Nabiullina said Russia’s GDP fell by between 9 and 10 per cent in the second quarter of 2020, and was unlikely to recover fully before the end of next year.
“We continued to ease monetary policy foremost because risks [that] inflation may deviate below 4 per cent in 2021 remain. This is due to the significant decrease in economic activity and the fall in internal and external demand,” she said. “Recovery, in our estimate, will take more than one-and-a-half years, which will have a limiting influence on price dynamics.”
The bank hopes that lower rates will spur lending and increase spending and investment. The lockdown, cuts in salaries and rising unemployment have all tempered retail spending. Inflation, the bank’s primary concern, stood at 3.2 per cent in June, comfortably below its 4 per cent target.
The rouble slipped slightly following the announcement. Russia’s currency has weakened by 15 per cent this year, due to lower oil prices, worries over global growth and concerns about a new wave of US sanctions against Moscow.
The fall in oil prices below Russia’s budgetary break-even price of $42 per barrel has also limited Moscow’s ability to squirrel away surplus revenue for its $174bn national wealth fund.
The finance ministry has been selling foreign currency from the fund to help compensate for the drop in projected oil revenues.
On Friday, Russia tweaked budgetary rules to allow the government to spend an extra Rbs1.8tn on efforts to mitigate the pandemic. Most of the funding will come from a planned Rbs2.3tn in rouble-denominated government bond sales in the domestic financial market.
Under the new rules, income from the wealth fund’s holdings will be used to cover budget expenditures until 2022. Ms Nabiullina said Russia would return to its conservative budget policy once additional government expenditure and the central bank’s inflation targeting helped the economy recover.
“This year the cabinet expanded budget expenditure more significantly than the budget rule allows in order to support the economy and citizens during a powerful negative shock. This was absolutely justified, especially at the early stage of the crisis,” she said.
“The current easing of fiscal policy will largely affect inflation dynamics and the economy next year, thus compensating for the effect from the consolidation of the budget,” she added.
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July 24, 2020 at 05:58PM
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Russia cuts rates to fresh low as Covid-19 impact drags on economy - Financial Times
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