The Bank of Russia cut interest rates by the most in five years and signaled another reduction is likely to help stimulate an economy heading toward a deep recession.
The benchmark interest rate was cut 100 basis points to 4.5%, the lowest level since inflation-targeting began in late 2014, the central bank said in a statement. Policy makers warned that a slump this quarter could be worse than expected and inflation could “significantly deviate” from a 4% target next year.
After years of keeping borrowing costs in Russia relatively high, Governor Elvira Nabiullina is catching up with other central bankers in slashing rates. The economy of world’s biggest energy exporter took a double hit this year from coronavirus and slump in oil prices.
“The Bank of Russia finally delivered a proper rate cut after adopting a far more cautious approach compared to other emerging-market central banks,” said Piotr Matys, a strategist at Rabobank in London. “The official statement paints to a very grim picture.”
Five-year government bond yields fell the most in more than a month to trade near a record low and the ruble largely held onto gains. Government bonds have rallied in recent months in expectation of monetary easing.
Rate cuts of a full percentage point won’t become the norm for the central bank, which prefers to move in smaller steps, Nabiullina said.
The central bank forecasts that the economy may shrink as much as 6% this year and Nabiullina said a recovery could be longer than earlier expected. Data published later in the day showed retail sales slumped 19% in May compared to a year earlier, a bigger drop than economists forecast. The unemployment rate climbed to 6.1%.