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Russia's Central Bank Cuts Key Interest Rate to Record Low


Sat 25 Jul 2020 | 03:41 AM
Taarek Refaat

The Central Bank of Russia lowered its benchmark one-week repo rate by another 25 basis points to 4.25% during its July meeting, saying inflation expectations have stabilized following a drop in both May and June.

It is the fourth rate cut this year, which aims to support the economy after being hit by the coronavirus (COVID-19) pandemic.

Russia has cut interest rates four times this year in an effort to support the economy, which was devastated by the coronavirus and related closures, as well as lower oil prices, and major exports.

Policymakers believe that the recovery will only be gradual, and there is a risk that inflation in 2021 will deviate from the 4% target.

Governor Elvira Nabiullina said there was still scope for lower rates, adding that the bank would need to assess the impact of previous rate cuts.

"If the situation evolves in line with the baseline expectations, the Bank of Russia will consider the necessity of further major rate cuts at its next meetings," the central bank said in a statement.

Analysts also expect that the central bank will continue to cut interest rates later this year.

The bank has also revised the interest range neutral from the monetary policy point of view to 5-6% from 6-7%, sending a signal to Russian bond investors that their yields will decrease, while also revising its economic forecasts.

Russia's Central bank Cuts Key Interest Rate to Record Low

After the gross domestic product (GDP) contracted by 9-10% in Q2, the central bank now expects the economy to contract by 4.5-5.5% this year before returning to growth in 2021.

Moreover, Inflation is expected to end this year at 3.7-4.2%, to settle near its 4% target in 2021 and 2022.

Russia expects another interest rate cut

Russia's largest bank "Sberbank" said it expects the central bank to cut its benchmark interest rate by another 25 basis points to 4% at the next board meeting on September 18.

Also, Analysts from BNP Paribas said they expected an additional 25 basis points cut this year as Friday's decision maintained a bias.

Meantime, Russia's central bank opposes using wealth fund to hedge oil revenues.