The key rate cut to 8.00%

RUSSIA ECONOMICS - In Brief 22 Jul 2022 by Alexander Kudrin

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The CBR cut the key rate by 150 bps to 8.00%, which is a rational move in the current domestic environment amid continuous efforts of “unfriendly” jurisdictions to damage the country’s economy as much as possible. As Russia gets increasingly isolated from the “unfriendly” financial markets while its current account is historically strong, the ruble remains overappreciated, which may indeed start damaging the country’s domestic tradable sector quite seriously. At the same time, since the end of May, Russia’s consumer price index stopped growing even amid the indexation of regulated tariffs in July. In the first half of July, inflation was at zero, and in seven days ending on July 15, deflation reached 0.17% w-o-w. In July, the m-o-m deflation may be around 0.3-0.4%. If so, the y-o-y deflation will decelerate to 15.1-15.2%. Even though annualized 6M moving average inflation (seemingly a better measure of the current inflation in the highly volatile environment) remains high due to high numbers in March and April, it will fall sharply in September. By year-end, inflation is likely to fall below 13%. Therefore, in stark contrast to global major central banks, aggressive key rate cuts in Russia look very reasonable as, eventually, they will help the domestic lending market recover and support economic activity, especially on the consumer side. As the consumer lending rate remains too high, household consumption of consumer durables fell sharply – an issue previously discussed in the notes of this series. Overall, Russia will keep drifting along its way: geopolitically, economically, or financially. Evgeny Gavrilenkov Alexander Kudrin