Russia’s central bank cuts interest rates to pre-war level

Russia’s central bank cut interest rates back to their 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 been as high as 20% in the wake of the February 24 invasion of Ukraine and the resulting sanctions by the US, European Union and other nations that restrict dealings with Russian banks, individuals and companies.

Economists say that over time the sanctions will corrode growth and productivity, but the central bank has managed to stabilise Russia’s currency and financial system through drastic measures such as high interest rates, restrictions on flows of money out of the country and a requirement that importers sell their foreign currency earnings for roubles.

Those measures have helped push the Russian currency’s exchange rate to 58.12 against the dollar on Friday, compared with 78.8 roubles to the dollar on February 23, the day before the invasion.

Inflation was an annual 17% in May but appeared to have passed its post-invasion peak of 17.8% and to be headed down amid lower price increases in May and June, the central bank said.

It predicted inflation would average 14% to 17% this year, decline to 5% to 7% next year and return to 4% in 2024.

Recent data pointed to a halt in the decline of business activity in May.

“The external environment for the Russian economy remains challenging and significantly constrains economic activity,” the central bank said.

While the bank has been able to prop up indicators such as the exchange rate, economists say the long-term impact of Russia’s disrupted ties with the global economy will be severe.

On top of 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 the Russian economy will contract by 15% in 2022, followed by a further 3% decline in 2023, and the country faces the loss of the last 15 years of economic gains.