By lowering its main interest rate just one month after lowering it to the level it was before the country launched soldiers into Ukraine, the Russian central bank broke with its Western counterparts.
Russia (AP) — By lowering its main interest rate on Friday, the Russian central bank broke with its Western counterparts, just a month after lowering it to the level it had been at before the country launched soldiers into Ukraine.
The bank reduced its benchmark interest rate by 1.5 percentage points, to 8%, noting that the ongoing decline in consumer demand is contributing to the continued softening of consumer prices. It stated that while a downturn in economic activity was less than anticipated in June, inflation predictions have “substantially decreased,” reaching levels seen in spring 2021.
The central bank issued a statement saying that “the external environment for the Russian economy remains tough and continues to considerably limit economic activity.”
After the military intervention in Ukraine on February 24 and the ensuing Western sanctions, which limit business with Russian banks, people, and enterprises, the rate had increased by as much as 20%.
By preventing money from leaving the country and requiring exporters to convert the majority of their foreign earnings into rubles, the central bank has been able to stabilize the currency and financial system as sanctions and the exodus of Western corporations from Russia have caused the country to become economically isolated globally.
Friday’s exchange rate of the ruble was 58.8, making it more valuable than the day before the invasion of Ukraine when it cost 78.8 rubles to buy one dollar.
The bank reported that annual inflation dropped to 15.9% in June from 17.1% in May and predicted that it would reach 15.5% by July 15. It attributed the decline to “subdued consumer demand” and the value of the ruble.
Elvira Nabiullina, the president of the central bank, stated during a news conference that “the recent largely involuntary accumulation of savings is a compressed spring in the economy, which might cause spectacular consumption growth under specific circumstances.” “A restricted supply of products and services can swiftly accelerate demand inflation.”
The bank anticipates that inflation will continue to decline, reaching 12–15% this year, 5-7% in 2023, and 4% in 2024.
As central banks across the world move in the opposite direction, raising rates to battle inflation sparked by Russia’s actions in Ukraine, the interest rate drop is announced. Due to the military operation’s high energy costs, the European Central Bank increased interest rates by a larger amount than anticipated on Thursday, pushing consumer prices up to 8.6%.
Russia, a significant supplier of natural gas and oil, stands to gain from these energy costs. Despite rising energy revenues and the central bank supporting key metrics like the exchange rate, economists predict that Russia’s continued isolation from the rest of the world will lead to deeper economic stagnation and poorer earnings for its citizens.
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