Moscow (AFP) – Russia’s central bank on Friday cut its key interest rate to 20 percent — down from a two-decade high of 21 percent — as the economy slows and officials say months of rapid price rises are coming under control. Russia’s economy has been marked by volatility since it launched its full-scale military offensive on Ukraine in 2022, with growth now slowing after a period of what officials called “overheating”.
The Kremlin has massively ramped up military spending to support the campaign, pouring funds into weapons production and the army — outlays which have helped secure strong growth despite a barrage of Western sanctions. “We are close to a scenario of balanced economic growth,” Governor Elvira Nabiullina said in a press conference after the decision was announced. She added that it looked as if the economy was heading for a soft landing, saying she saw “no overcooling”.
Annual growth slowed to 1.4 percent in the first quarter, according to official statistics, the weakest reading in two years. Economists have warned for months that falling oil prices, high interest rates and a downturn in manufacturing were all weighing on the economy. Russia has defied predictions its offensive on Ukraine and sanctions would push it into a deep and lengthy recession. Government spending has jumped more than two-thirds since before the campaign, with military expenditure accounting for almost nine percent of GDP, according to President Vladimir Putin. Those levels are unseen since the Soviet Union and have led to months of rapidly rising prices and deep labour shortages, heaping pressure on households and businesses not connected to the offensive.
– ‘Turning point’ – Inflation is still running around 10 percent, but the central bank noted that price “pressures” were “continuing to decline”. Nabiullina had come under increasing political pressure this year to cut interest rates, which businesses said were throttling the economy and killing investment. Friday’s decision was the first time the central bank has moved to cut rates since September 2022. It warned that despite the one percentage-point cut, “monetary policy will remain tight for a long period.”
“Inflation ultimately eats away at the economy’s potential, so our goal is to curb inflation and allow the real sector of the economy to develop,” Nabiullina said in a statement, saying the bank’s high interest rates had contained the pace of price rises. Russia officially targets inflation of four percent, but does not expect to return to this level until next year. The chief economist of Moscow-based T-Investments, Sofya Donets, said the decision to start cutting rates could be a “turning point.” “Finally, the Central Bank has noticed a sufficiently stable decline in inflation. However, the regulator still prefers to act conservatively,” she said in a post on Telegram.
© 2024 AFP
