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Russia’s central bank cut its benchmark interest rate to 11% from 14% in a hastily called meeting on Thursday as policymakers sought to support businesses and households struggling with sanctions.
The bank is cutting interest rates faster than expected as the country’s currency has appreciated rapidly, hitting its highest level in four years against the US dollar this week.
Capital controls imposed by the central bank after Russia’s invasion of Ukraine, particularly those that force exporters to exchange their earnings into rubles, have increased demand for Russian currency.
The country’s large current account surplus, a measure of trade and investment flows, has been supported by strong oil and gas export revenues and a decline in imports, and is also keeping the ruble high. While the strength of the ruble has the advantage of calming inflation, it also puts pressure on the country’s public finances as the budget relies on oil export revenues denominated in dollars.
Russia’s annual inflation rate soared to 17.8% last month, the central bank said, but it is estimated to have fallen slightly since then, faster than policymakers expected.
In the days following Russia’s February 24 invasion of Ukraine, the currency fell to its lowest level ever against the US dollar. The bank quickly raised its benchmark interest rate to 20% and imposed capital controls to limit the flow of money out of the country in an effort to prop up the currency. Since then, the ruble has strengthened and become the best performing currency in the world. That’s up 25 percent against the dollar this year.
Amid the currency’s rapid ascent, Russia eased some of its capital controls. On Monday, the Finance Ministry said exporting companies only had to exchange half of their foreign currency earnings into rubles within 60 days. Previously, they had to trade 80 percent.
The central bank has leeway to cut interest rates as it focuses on stimulating an economic recovery. The bank had previously predicted the economy would contract by up to 10% this year as companies had to develop new supply chains with even fewer imported goods.
The bank has signaled that further interest rate cuts may occur at upcoming meetings. The next policy decision is scheduled for June 10.