Russia’s central bank cut interest rates to pre-war levels on Friday, saying inflation and economic activity were developing better than expected despite sweeping Western sanctions imposed in response to the war in Ukraine.
The bank lowered its key rate by 1.5 percentage points to 9.5%. The rate had reached 20% following the invasion of Ukraine on February 24 and the resulting sanctions by the United States, the European Union and other countries that restrict transactions with banks, Russian individuals and companies.
Economists say that over time the sanctions will corrode growth and productivity, but the central bank has managed to stabilize Russia’s currency and financial system through drastic measures such as high interest rates, restrictions on the flow of money out of the country and the obligation for importers to sell their foreign currency earnings for rubles.
These measures helped push the Russian currency’s exchange rate to 58.12 against the dollar on Friday, from 78.8 rubles to the dollar on February 23, the day before the invasion.
Inflation was 17% a year in May, but appears to have passed its post-invasion peak of 17.8% and headed for lower price increases in May and June, the central bank said. He predicted inflation would average 14% to 17% this year, fall to 5% to 7% next year and return to 4% in 2024.
Recent data indicated a halt in the decline in business activity in May.
“The external environment for the Russian economy remains challenging and significantly constrains economic activity,” the central bank said.
Although the bank was able to support indicators such as the exchange rate, economists say the long-term impact of Russia’s disrupted ties to the global economy will be severe.
In addition to the sanctions, many international companies have abandoned their investments in Russia due to the increased difficulty of doing business or because they do not want to be associated with the war.
The Institute of International Finance predicts that the Russian economy will contract by 15% in 2022, followed by a further decline of 3% in 2023, and the country faces the loss of the last 15 years of economic gains.
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