While the West increases them, Russia must strongly reduce interest rates

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While the West increases them, Russia must strongly reduce interest rates
While the West increases them, Russia must strongly reduce interest rates

While Europe and America have to raise interest rates to curb inflation, Russia is suffering from the diametrically opposite problem. Due to a sharp slowdown in price growth, the Russian central bank at the end of last week lowered the interest rate more than expected, bringing it down to the level before the Russian invasion of neighboring Ukraine.

Additional loosening

While economists expected a reduction of 50 basis points, the Bank of Russia under the leadership of Governor Elvira Nabiulina decided on a reduction of as much as 150 basis points. As a result, the interest rate fell from 9.5 to 8 percent, reports Bloomberg.

In addition, the central bank signaled that it intends to further reduce monetary policy during the second half of the year. By the way, this is the fifth consecutive lowering of the price of money by the Bank of Russia. With the publication of the news, the value of the ruble against the US dollar fell by 2.6 percent.

Governor Nabiulina stated at the press conference that the decision was motivated by falling prices and lowered expectations for inflation in the coming period. "The latest data show that the economic downturn will be prolonged and probably less deep," said Nabiulina.

Among the three options for loosening the monetary policy, the Bank of Russia decided to cut the interest rate the most, the governor added. The cycle of lowering the interest rate began in April after the slowdown in inflation due to the rapid strengthening of the Russian currency and the strong "cooling" of the economy under pressure from sanctions.

However, precisely because of its isolation from international markets, Russia is more immune to the consequences of the tightening of the monetary policy of the leading Western central banks. "The central bank decided to be proactive, but no one expected on such a scale," Dmitrij Polevoj, an economist at Locko-Invest, commented to Bloomberg.

According to him, the central bank will now take a short break and monitor macroeconomic trends. With the outbreak of war in Ukraine and punishing Russia for starting the conflict with harsh sanctions, Western economists estimated in March that its economy would shrink by up to 10 percent this year.

However, the forecasts are now considerably softened and a much milder recession is expected. Primarily due to fiscal incentives and growing oil production, which overcame the impact of American and European sanctions.


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