Russian Ruble Remains Near 19-month Highs as Bank of Russia Cuts Interest Rate by 25 Basis Points

The Bank of Russia unexpectedly cut interest rates by 25 basis points to 9.75 percent on Friday, citing better-than-expected economic growth numbers during the first few months of 2017.

In her statement, Bank of Russia Governor Elvira Nabiullina said excessive inflation has slowed down considerably, but further declines are needed over the coming months, “We need to see inflation not just slowing down, but anchoring near the 4% target.,” said Nabiullina.

According to Nabiullina’s statement, the strengthening ruble, which has appreciated approximately 33.6 percent against the dollar since January of 2016, played a major role in bring excessive inflation under control:
“The ruble appreciation triggered inflation to reduce faster than forecast. It has affected all goods and individual services in recent months, especially food prices. Exchange rate movements also decelerated growth in non-food goods and service prices.”

While the Russian economy and currency were hit hard in the second half of 2015 and into the start of 2016, when the USD/RUB exchange rate hit an all-time high of 82.45, Nabiullina explained that the economic crisis wasn’t “so deep in 2015-2016 and the economy saw a recovery earlier than expected.”

Comparing the economic crunch of 2015-2016 to the one in 2008, Nabiullina said GDP only dropped 3% during the last economic downturn.

Although the appreciation of the ruble has brought excessive inflation under control, the uncertainty lingering in the oil markets, and the effect of rising interest rates in the United States on the dollar, may negatively impact the Russian economy at some point, said Nabiullina:
“In a scenario when we see oil prices slump from the current relatively high levels, both business and household expectations are set to be negatively affected for a time.”
The announcement by the Bank of Russia briefly pushed the USD/RUB exchange rate towards a 34-day low of 56.6035, but there wasn’t sufficient selling momentum to break the 19-month low at 56.5608, printed on February 15, 2017.

To support the downward trend in inflation towards the 4% target, Governor Elvira Nabiullina said additional interest rate reductions may take place in Q2 and Q3 of 2017.

Rubles banknotes photo by Martha de Jong-Lantink