Russia’s central bank cut its policy rate by 150 basis points to 8% in July, well above market expectations for a smaller cut of 50 basis points and brought interest rates below pre-war level.
Following this decision, the ruble lost up to 2.6% in value against the greenback.
“The external environment of the Russian economy remains difficult and significantly constrains economic activity,” the Bank of Russia said in a statement.
Still, he said the decline in business activity was slower than the bank had expected in June.
“Current consumer price growth rates remain weak, contributing to a further slowdown in annual inflation,” he said.
In June, Russia’s annual inflation fell to 15.9% from 17.1% in May.
According to central bank forecasts, annual inflation will decline to 12-15% in 2022, 5-7% in 2023, and return to 4% in 2024.
Monetary conditions continued to ease but generally remained tight as inflation expectations declined, he said.
Stressing that the movements of the economy and inflation largely depend on fiscal policy decisions, the bank said it had taken into account the measures already in place related to the medium-term spending path of the federal budget and of the tax system as a whole. .
He said that in the event of “further expansion of the fiscal deficit”, tighter monetary policy may be needed to bring inflation back to the 2024 target and keep it close to 4%.
Meanwhile, the bank’s governor, Elvira Nabiullina, told reporters in Moscow that incoming data indicates the economic downturn will be more prolonged in time and possibly shallower.
The bank picked the biggest rate cut, she said.
“The economic situation depends on how companies adapt to changing conditions. This adjustment is very uneven across regions, industries and even individual companies within the same sector,” she said.
Noting that the ruble’s strength has influenced price perceptions and household attitudes towards purchases, she said: “This is clearly evident in changes in inflation expectations. In July, they fell slightly to 10.8%, which is the lowest level since March 2021. .
“People think the current prices of many goods are unreasonably high and are waiting for them to come down. Business expectations for short-term prices continue to fall,” she said.