Russia’s Central Bank Halts Rate Cut after U.S. Sanctions

The Russian central bank decided to keep its key interest rate unchanged on Friday, halting a rate-cutting cycle in response to new U.S. sanctions, reported.

The central bank kept the key rate at 7.25 percent, in a move widely expected among experts and investors. The rate was cut twice earlier this year. The monetary watchdog also indicated there was less room for further rate cuts. The last time the central bank left the rate unchanged at one of its scheduled rate meetings was in July 2017.

“The April weakening in the rouble against the backdrop of geopolitical tension will be a factor for consumer price growth paces to quicken as they move closer to 4 percent,” the bank said in a statement.

The bank’s decision was in line with market expectations that the Bank of Russia would postpone a planned rate cut following a massive market sell-off triggered by new U.S. sanctions on Moscow announced on April 6.

The sanctions, which hit some of Russia’s biggest companies and most prominent businessmen, sent the rouble down to its weakest level since 2016, raising concerns that the weaker currency would soon translate into rising prices.

“The Bank of Russia considers that the potential key rate reduction intended to bring about neutral monetary conditions has decreased given the rise in interest rates across advanced economies and country risk premium growth for Russia,” the central bank said.

The rouble showed a muted reaction to the rate decision, trading at 62.68 versus the dollar.

The central bank, however, said it was still considering switching to a so-called neutral monetary policy in 2018 as annual inflation was below its 4 percent target, hovering at 2.3-2.5 percent in April.

“The Bank of Russia’s estimates suggest that the potential for key rate reduction to shape neutral monetary conditions shrank somewhat,” it said.

Now, the estimated neutral interest rate has shifted closer to its upper limit within the range of 6–7 percent, the central bank said.

The Bank of Russia is due to hold its next rate-setting meeting on June 15.