Last Friday, the Bank of Russia decided to reduce the base rate by 1.5 p.p. to 8.0%. This is the fifth downgrade since April 2022. We should remind that in February 2022, the Central Bank sharply raised the rate to 20%.
Following the Russian regulator, the rate cut is due to a slight increase in consumer prices in the economy, which contributes to a slowdown in annual inflation (in June, inflation was 15.9% with a target of 4%), a decrease in business activity, as well as a slowdown in household and business inflation expectations. At the same time, external conditions are still difficult and limit the economic activity of the country.
According to Rosstat, weekly deflation has been observed in Russia once again, and by the latest data (from July 9 to July 15), it noticeably accelerated to 0.17% (a week earlier it was 0.03%).
In our opinion, under the conditions of sanctions and restrictions, the model of the Russian economy is more like a “closed-in” one, and upon this, easing monetary policy is quite logical. Keeping the key rate at a high level contributes to economic contraction and the emergence of recessionary phenomena. Russia needs a certain economic transformation to quickly absorb shocks and get out of recession.
As world experience shows, the progressive recession is economically deleterious and can significantly set back the development of the country. In our view, the key signal of the base rate reduction in Russia lies precisely in the reduction of business funding costs and business activity growth. Given the problems associated with the disruption of production chains and the transformation of consumer demand, the possibility of obtaining new loans and refinancing at a cheaper rate is becoming a rather critical aspect for the recovery and restructuring of the Russian economy.