Russia to continue cutting rates amid virus-boosted economic contraction: Reuters poll By Reuters

Russia to continue cutting rates amid virus-boosted economic contraction: Reuters

© Reuters. A Russian flag flies over Russian Central Bank headquarters in Moscow

By Andrey Ostroukh

MOSCOW (Reuters) – The Russian central bank will continue cutting interest rates in 2020, as it faces a worsening economic contraction and lower inflationary risks, a Reuters poll showed on Friday.

Economic activity in Russia has been pummeled since late March by lockdowns across the country designed to slow the spread of the novel coronavirus.

The consensus forecasts of 21 analysts and economists suggested gross domestic product will contract 3.8% in 2020 before growing 3% in 2021.

A month ago, when official data was yet to reflect the impact of the lockdowns, a similar poll showed the economy would shrink by 3.4% this year.

The biggest contraction, 9.1%, is expected in the second quarter, followed by a 4.9% drop in the third, 3.6% in the fourth and 2.1% in the first quarter of 2021.

“The peak of the pandemic in Russia has passed, but the post-pandemic future holds many challenges. The government’s ability to shield the economy and population remains the key swing factor in shoring up the future,” BCS Brokerage said.

In April, the first full month of the lockdown, the economy shrank by 12% on-year, cementing expectations that the central bank will cut rates next month.

The central bank is expected to lower its key rate to 5% in June, delivering a 50-basis-point cut that is smaller than a 100-basis-point step the central bank pledged to consider, the poll showed.

“The CBR will resist the temptation to cut the policy rate prior to the scheduled meeting on 19 June and pay more attention to transmission of the recent steps into market rates and utilization of the subsidized lending,” said Artem Zaigrin, chief economist at Sova Capital brokerage.

In the third quarter, the central bank is seen slashing the key rate to 4.5%, where it will hold it into the middle of 2021. Forecasts for the end-2020 reading varied between 3.5% and 5%.

The previous monthly poll foresaw the rate at 4.75% in the third quarter and 4.5% by year-end.

Inflation, which the central bank targets at 4%, is now seen finishing this year at 4.2%, down from 4.5% in the late-April poll.

Most of the forecasts in the Reuters poll were based on at least 10 individual projections.

The rouble outlook against the U.S. dollar was largely unchanged. The rouble was expected to trade at 70 to the dollar and 75.80 to the euro 12 months from now. The previous poll foresaw exchange rates of 69 and 77.97, respectively.

On Friday, the rouble’s official exchange rates, set by the central bank, were 71.10 per dollar and 78.26 per euro.

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