Bank of Russia Says Rate Cuts Possible This Year

The governor of the Bank of Russia, Elvira Nabiullina, said on Friday the regulator could cut interest rates in a bid to soften the economic damage of the coronavirus, Reuters reported.

According to Nabiulina, there had been a “sharp deterioration in the situation in the global economy” in recent weeks, and added that it expected “global GDP in the second quarter to decrease significantly.”

Commenting on the extension of a nationwide holiday announced by President Vladimir Putin on Thursday, Nabiullina said:

“These measures, which are absolutely necessary to combat the epidemic will, unfortunately, inevitably have a negative effect on the economy. The consequences of restrictive measures on aggregate demand … are likely to be longer-lasting and this will be a significant factor of disinflation. Given the development of the situation under this scenario and the stability of the financial markets, we see some potential for reducing the key interest rate during 2020.”

Interest rates are currently at 6%, having been heavily cut over 2019 as inflation fell below the bank’s 4% target. The crash in the value of the ruble this year has already led to an increase in inflation, which is expected to surge past the 4% threshold during the coming months. However, Nabiullina dismissed ideas that such dynamics could tempt the bank to raise interest rates — the standard response by central banks to accelerating inflation — saying the rise would be “short-term, and without significant secondary effects.”

Last time the ruble experienced sharp volatility in 2014, the central bank hiked rates to 17% in a bid to shore up the currency, but analysts say Russia’s new financial tool kit introduced after that crisis means such extreme measures are unnecessary this time around.

Central to the bank’s response over the last month has been a strengthening of the so-called fiscal rule which sees Russia selling its foreign currency reserves when oil prices are low, thereby providing support to the ruble.