Russia unexpectedly cuts key rate amid drop in inflation

The Central Bank of Russia has cut interest rates and signalled that further rate cuts lie ahead

Bank of Russia Chairwoman Elvira Nabiullina claimed that interest rates would continue to fall steadily 

On March 24, policymakers at the Bank of Russia unanimously voted to cut interest rates amid a faster-than-expected drop in inflation. The decision lowered the key interest rate by 0.25 percent, from 10 percent to 9.75 percent.

After a period of soaring inflation in Russia, prices appear to have stabilised at a more manageable level. Last month, inflation dropped to just 4.6 percent after a peak of 17 percent seen just over two years ago. Crucially, these latest numbers bring the bank’s target of four percent into sight. According to a statement from the bank of Russia: “The inflation slowdown is overshooting the forecast, inflation expectations continue to decline and economic activity is recovering.”

Last month, inflation dropped to 4.6 percent after a peak of 17 percent two years ago

Furthermore, rate decreases could continue over the coming months. The statement said that the bank sees “the possibility of cutting the key rate gradually in the coming second and third quarters”. Bank of Russia Chairwoman Elvira Nabiullina emphasised that rate cuts were a “trend”, and further elaborated that policymakers would lower the main interest rate “gradually, possibly with a few pauses and while retaining a moderately tight monetary policy”.

The move comes at a time when the Russian economy continues to struggle as a result of the combined impact of US sanctions and low energy prices. With Russian interest rates particularly high in comparison to other emerging markets, a trend towards lower rates could be an important driver of growth as the economy begins to recover. Growth projections, however, remain modest. GDP is projected to grow in the range of one percent to 1.5 percent over the coming year, and between one and two percent the following year.