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Russia cuts rates again, taking aim at rouble rebound that’s gone too far

MOSCOW (BLOOMBERG) -  Russia’s central bank delivered its third interest rate reduction in just over a month and said borrowing costs could fall further still, as it looked to stem a rally in the rouble and unwind the financial defences in place since the invasion of Ukraine.

The Bank of Russia lowered its benchmark to 11 per cent from 14 per cent on Thursday (May 26) at an extraordinary meeting it announced only a day earlier.

The central bank said it “holds open the prospect of a key rate reduction at its upcoming meetings”.

In a statement accompanying the decision, policymakers made little mention of the rouble beyond noting that the exchange rate contributed to slower inflation.

“External conditions for the Russian economy are still challenging, considerably constraining economic activity,” they said. “Financial stability risks decreased somewhat, enabling a relaxation of some capital control measures.”

Encouraged by a faster-than-expected slowdown in inflation after shocks to demand, the decision shows the central bank’s determination to get in the way of the rouble’s blistering ascent. It added to two rate cuts of three percentage points each in April, reversing most of an emergency monetary tightening after the invasion of Ukraine three months ago. 

Despite the sweeping sanctions imposed on Russia, surging exports and capital controls have sapped demand for foreign exchange and sent the rouble soaring to the highest levels since 2018. Efforts by the authorities to slow the gains, including the easing of key capital controls earlier this week, have so far not helped much.

The central bank also wants to provide a shot in the arm to an economy that is on track for a sharp contraction. With the collapse in consumer demand, weekly inflation is slowing after a run-up in prices because of a spate of panic-buying in the months immediately following the invasion.

The rouble’s 30 per cent gain this year has taken it to “the pain threshold”, said Mr Dmitry Polevoy of Locko Bank. Still, a rate cut alone “is unlikely to stop the strengthening” because it is driven by a huge trade surplus, he said.

Bloomberg Economics said: “A soaring rouble and falling interest rates reflect a combination of sanctions resilience, a capable policy response and Europe’s reluctance to target Russia’s biggest sources of export revenue.

“But the backdrop is still a dire outlook for demand amid a severe disruption to supply chains. The central bank’s rush to cushion the blow reflects the severity of the shocks pulsing through the economy.”

President Vladimir Putin has also touted the gains as a sign that the country has survived the unprecedented sanctions imposed by the United States and its allies to punish Moscow for its invasion of Ukraine.

But Russia’s oil and gas exports are mostly exempt from the penalties, sending billions of dollars and euros flowing into the country each week. Dwindling imports and restrictions on buying and sending funds abroad, meanwhile, have all but eradicated demand for hard currency. 

Enough pressure built on the rouble in recent days to prompt speculation that the central bank moved up a planned rates meeting by more than two weeks to Thursday in order to temper the strongest currency rally globally. 

The announcement was also published several hours earlier than the normal time on rate decision days in Russia.