Bank of Russia cutting rates to support economy
On 19 June, the Central Bank of Russia cut the key rate by 100 basis points to 4,5% bringing it to the lowest post-Soviet level. The regulator’s policy is radically different compared to previous economic downturns, but the nature of the current crisis is also dissimilar.
The Bank of Russia’s rate-cutting policy is likely to benefit the Russian economy, as a steeper yield curve might offer clues to the country’s recovery, considers Seeking Alpha. The International Monetary Fund expects Russia’s GDP to fall by 6,6% this year, which may become the economy’s worst performance since 2009. However, the country’s Central Bank is reacting in a very different manner compared to 2008-2009 and 2014-2015. When the ruble plunged alongside oil prices during the last two crises, the regulator raised short-term borrowing costs significantly in order to curb inflation.
This time, the Bank of Russia is steadily cutting the key interest rate, as the ruble is much more stable in the face of weaker growth than in the past. During the 2008 global financial crisis, the Russian currency fell by 37% versus the US dollar. The 2014-2016 oil price collapse made the ruble slump by 61% versus the dollar. This year, the peak-to-trough sell-off in RUB-USD has so far amounted to 26,5%. However, the ruble has already rebounded. In the middle of June, it was only 12% below its January peak.
The Russian currency’s resilience is partially due to the nature of the global crisis itself. While the downturn of 2014-2016 hit mostly commodity producers, especially oil exporters, the current crisis is affecting the wider, global economy. Thus, the Russian economy is facing the same problems as in the US, Europe and elsewhere. Moreover, Russia’s Central Bank has the option to cut interest rates, which are still far above zero, to stimulate growth.
By cutting interest rates, the regulator is also gradually steepening the yield curve. As of the middle of June, Russia’s 1-10-year yield curve has been the steepest since 2011, although it’s still a long way from its steepest level ever. Further cuts to short-term rates may steepen the yield curve even more, which is most likely be good news for the Russian economy given a strong positive correlation between the slope of Russia’s yield curve and subsequent GDP growth recorded over the last years. At the same time, the course of the pandemic will certainly play a big role as well.
Even with the current interest rates, depositors in Russia have an advantage of about 5% over depositors in the US and Europe. Nonetheless, continued low rates of inflation may prevent the Bank of Russia from cutting rates further. As long as inflation doesn’t pick up and the ruble remains relatively stable, the regulator may feel little need to tighten policy, believes Erik Norland from CME Group.