Russia lowers key rate sharply to 14%, eyes more cuts

© Reuters. FILE PHOTO: People walk past the Central Bank headquarters in Moscow, Russia February 11, 2019. REUTERS/Maxim Shemetov/File Photo

(Reuters) -Russia's central bank lowered its key interest rate to 14% in a sharper-than-expected move on Friday and said it saw room to cut rates further this year, as it tries to manage a shrinking economy and soaring inflation.

The central bank met after it unexpectedly cut the key rate to 17% earlier in April. That had followed an emergency rate increase to 20% from 9.5% days after Russia sent tens of thousands of troops into Ukraine on Feb. 24.

Friday's rate cut exceeded expectations for a 200-basis-point move in a Reuters poll, which Governor Elvira Nabiullina said was the other option the bank had considered.

"Today, we see room for a key rate reduction before the end of the year," Nabiullina told a media conference that was held in person for the first time since early 2020.

"We will make our further decisions on monetary policy considering that the economy needs to adjust to the dramatically changing conditions. Price stability is always the top priority for us as it is critical for steady economic growth," she said.

Analysts had predicted Russia would need lower rates in the face of a looming economic recession following the West's imposition of unprecedented sanctions, which in turn prompted Russia to impose capital controls. [nL2N2WJ0RJ]

A Reuters poll showed on Friday that Russia was expected to slash its key rate to 10.5% by the year-end as the firming rouble helps cap inflationary risks, while steering the economy through its steepest contraction since the years following the 1991 fall of the Soviet Union.

"Rouble exchange rate dynamics will remain a meaningful factor shaping the path of inflation and inflation expectations," the central bank said in a statement.

Russia's export-dependent economy will shrink 8-10% this year, the central bank's renewed set of forecasts showed.

EXTREME UNCERTAINTY

The central bank is carrying out its policy as Russia continues what it calls "a special military operation" in Ukraine, prompting the West to impose ever more sanctions against Russia.

Sanctions have already disrupted trade logistics and frozen around half of Russia's state gold and forex reserves, putting Russia on the brink of sovereign default and creating lacklustre economic conditions.

"The current situation is extremely uncertain," Nabiullina said.

Inflation, which the bank hopes to bring down to its 4% target in 2024, is on track to accelerate to 18-23% this year from 17.6% seen as of April 22, a more than 20-year high.

Nabiullina said the risk of an inflationary spiral that may get out of control had decreased after the emergency rate hike in February, but that the bank was ready to use monetary policy tools should inflation accelerate again.

"Monetary policy should take into account the processes of adaptation and structural transformation in the economy... This is why we have no intention to quickly bring inflation back to the target."

Analysts did not give clear forecasts on the next rate-setting meeting scheduled for June 10.

"By having capital controls they can chop their interest rate to where they want too, as you have seen today," said Saxo Bank's head of FX strategy John Hardy.

"The degree of uncertainty remains high and we don't rule out that the next move could be out-of-schedule," said Sofia Donets, chief economist at Renaissance Capital.