Why did the central bank cut interest rates
On June 10, at a Board meeting, the Bank of Russia reduced the key rate by 1.5 percentage points, bringing it to 9.5 percent per year. This move followed a period of easing price pressures and stabilizing inflation expectations. Bank officials noted that recent data show lower price growth in May and early June, helped by movements in the ruble and the fading effects of a surge in consumer demand. The decision occurred alongside a broader assessment of inflation expectations among the public and businesses.
In its official briefing, the Central Bank highlighted that annual inflation had fallen from 17.8 percent in April to about 10 percent in June. Projections suggested that inflation could hover around 14 to 17 percent for the year 2022, with expectations for import substitution supporting the restoration of imports of finished goods and raw materials. The Bank also anticipated a gradual easing of price growth toward target levels, with a forecast of 5 to 7 percent for 2023 and a return to around 4 percent in 2024.
Despite the rate cut, the Bank signaled a cautious stance and indicated readiness to take further steps as inflation trends evolve toward the 4 percent target. Policy makers stressed that future decisions would consider both actual and expected inflation dynamics, domestic stability, and external conditions, while monitoring financial markets to gauge risk and adjust policy accordingly.
How has the rate changed over time is explained next. In 2021 the rate rose in eight consecutive steps. By March, the rate reached 4.25 percent year on year and then continued climbing. On February 11, 2022, the rate jumped to 9.5 percent, the highest since spring 2017. On February 28, it was raised again to 20 percent in response to external sanctions and the ruble’s depreciation. That period marked a historic peak amid the currency shock after the onset of the Ukraine crisis. Ahead of that spike, the annual rate of 17 percent, set in December 2014, stood as a record for several years.
External conditions for the Russian economy shifted notably, the Bank later noted, emphasizing that higher rates aimed to lift deposit yields and mitigate risks of devaluation and inflation. This helped maintain financial and price stability and shield citizens’ savings from eroding value. By mid-March the rate stood at 20 percent per year. A downward cycle began in April, with reductions to 17 percent on April 10, to 14 percent on April 29, and to 11 percent on May 26. The new level of 9.5 percent is a return to late February conditions.
Analysts pointed to the slowdown in inflation and easing inflation expectations, alongside ruble strengthening, as catalysts for the shift. Deposits and loan costs followed, with deposit rates moving toward 9.5 percent and consumer loan costs averaging around 12.5 percent. Earlier in the year, rates had surged to 20 to 30 percent before easing. Mortgage pricing also adjusted, with programs initially offered at favorable rates gradually returning to more standard levels as policy shifted. A government-backed mortgage program has seen rate adjustments as policy aims to balance affordability with fiscal considerations.
Experts noted that the rate change has implications for markets. The ruble’s value and the structure of savings and lending will respond to the shift in policy expectations. The anticipated impact includes a shift in funding costs for banks and potential changes to consumer borrowing activity, with lenders adjusting to the new equilibrium as funding costs realign with policy signals. Observers stressed that the overall effect on the financial system will depend on the path of inflation and the central bank’s readiness to respond to evolving conditions.
Looking at the stock market, some analysts view equities as an alternative to deposits and bonds as markets recover from the prior volatility. The central bank’s decision is seen as a factor that could support a more balanced equity environment, particularly for companies focused on domestic demand, including consumer goods, financials, communications, and utilities. The assessment suggests that the policy move may moderate the ruble’s strength while supporting a gradual recovery in asset prices as external conditions stabilize. Experts caution that the export and import dynamics remain a major influence. Heavy foreign currency supply from exporters, coupled with import disruptions, may prevent a rapid reversal in currency movements. As the year progresses, the pace of imports and the broader import substitution effort will influence the ruble and overall economic activity. Some market observers expect the dollar to hover around ranges like those seen in prior months, rather than delivering a swift return to historical peaks, though they acknowledge potential volatility ahead.