Russian central bank cuts key interest rate as rouble rebounds

Officials warned that inflation will continue to persist amid weaker economic conditions

The rouble, which slipped some 40 per cent to around 139 to the dollar early last month, has made a dramatic recovery this week. EPA

The Central Bank of Russia lowered its key interest rate to 17 per cent from 20 per cent on Friday, as the rouble continued to gain against the dollar this week on the back of capital controls in the country.

The rouble, which slipped some 40 per cent to around 139 to the dollar early last month, has made a dramatic recovery and was trading at 83.9 to the dollar at 3.50pm UAE time.

“The Russian rouble has been an interesting currency this week as it has made a tremendous comeback this week. It has reached its strongest level against the dollar for this year,” said Naeem Aslam, chief market analyst at AvaTrade.

“The rouble plunged when Russia attacked Ukraine, and US President Joe Biden made a joke … by calling it 'rubble'. Now the currency is sitting at a level where it was before the war against the dollar. The most important factor to pay attention to here is that this is despite seeing overall strength in the dollar index this week because of the ultra-hawkish stance by the Fed.”

Russia's central bank had hiked its key interest rate to 20 per cent in late February from 9.5 per cent, the highest hike since 2003, to compensate for the increased depreciation and inflation risks in the country.

On Friday, the central bank said it decided to cut the key rate by 300 basis points from April 11 and cautioned that economic conditions remain “challenging” and that inflation will continue to rise. Annual inflation in Russia surged to 16.7 per cent as of April 1, its highest since March 2015.

“Yet, the latest weekly data point to a noticeable slowdown in the current price growth rates, including owing to the rouble’s exchange rate dynamics. The tightening of monetary conditions already in place is partly offset by the lending support programmes launched by the government and the Bank of Russia, but it will continue to limit pro-inflationary risks,” it said in a statement.

“Today’s decision reflects a change in the balance of risks of accelerated consumer price growth, decline in economic activity and financial stability risks.”

It said that there could be a further rate reduction in the future.

The central bank will take into account “risks posed by external and domestic conditions and the reaction of financial markets, as well as actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon”, it said.

The rouble is also likely to continue regaining ground, Mr Aslam said.

“Given the recent comeback in the rouble, it is very clear that there is not only plenty of demand but strong demand for the currency which has pushed it out of its misery.”