Russia’s central bank warns of “widespread structural” economic shift

Russian President Vladimir Putin chairs a meeting with members of the Security Council via video link at the Novo-Ogaryovo State Residence outside Moscow, Russia on February 18, 2022.

Mikhail Klementiev | Sputnik | via Reuters

Russia’s central bank on Friday kept its monetary policy stable and kept its key interest rate at 20%, but warned of a great deal of uncertainty as the economy undergoes a “widespread structural transformation”.

In late February, shortly after Russian forces invaded Ukraine, the CBR more than doubled the country’s key interest rate From 9.5% to 20% in an effort to prop up its plunging currency and mitigate the impact of tough international sanctions.

The central bank said in its statement on Friday that the sharp increase in the key interest rate “helped maintain financial stability.”

“The Russian economy is entering a phase of a large-scale structural transformation, which will be accompanied by a temporary but inevitable period of increased inflation, which is mainly related to the adjustment of relative prices across a wide range of goods and services,” she said.

“The monetary policy of the Bank of Russia is set to enable the gradual adjustment of the economy to new conditions and the return of annual inflation to 4% in 2024.”

The rubles sank to record lows against dollar Against the backdrop of a barrage of new sanctions and sanctions imposed on Moscow by the United States and European allies, before they retreated in recent weeks. The currency settled at just over 104 per dollar after the decision on Friday.

Earlier this week, Russia staved off a historic debt default by completing some of its sovereign bond payments in dollars, Reuters reported. Russia’s Finance Ministry said on Friday it had fulfilled its commitment to pay coupons for dollar-denominated bonds in full.

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Western sanctions have targeted the large amounts of CBR’s foreign exchange reserves meant to make them virtually inaccessible, preventing policymakers from mitigating the devaluation of domestic assets.

Three fast food

While the decision was expected, the central bank’s statement gave some insight into how it views Russia’s economic outlook at the moment.

There are three main tips, said William Jackson, chief emerging markets economist at Capital Economics, the first of which is that the central bank appears to believe it has done enough with the emergency increase last month to stabilize the financial system and prevent a run on Russia. banks.

“Secondly, the CBR sees sanctions and the Russian government’s shift toward self-sufficiency and isolationism as something that is here for the long-term,” Jackson said, noting that the statement mentioned “large-scale structural transformation” on several occasions.

“And third, though, policy makers at the Central Bank of Canada are trying to maintain a semblance of macroeconomic orthodoxy. The overemphasis in the statement was on balancing inflation risks and that monetary policy would remain strict to prevent the second-round effects of the current inflation spike from getting out of hand.”

This may indicate that policymakers aim to roll back current capital controls, return to the floating ruble and eventually refocus monetary policy toward inflation targeting, Jackson suggested.

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