Russian central bank flags further interest rate cut

RUSSIAN central bank governor Elvira Nabiullina on Monday (Apr 18) flagged a further cut in interest rates and said it would take 2 years to rein back inflation to its 4 per cent target as the economy adapts to the impact of western sanctions.

"The period when the economy can live on reserves is finite. And already in the second and third quarter we will enter a period of structural transformation and the search for new business models," Nabiullina said in her most significant speech since Russia sent its forces into Ukraine on Feb 24.

She told Members of Parliament this would be accompanied by a surge in prices for certain goods so inflation - which hit an annual 17 per cent in March - would be above target. But this would be caused by low supply, not high demand.

"Therefore, we will not try to return it lower by any means - this would prevent business from adapting," she said. But "the growth of inflation should not be uncontrollable" and the bank's monetary policy would bring it back to the 4 per cent target in 2024.

The postponement of the bank's key target underscored the challenge facing one of the world's most respected central bankers as she tries to stabilise Russia's economy under the onslaught of western sanctions.

Nabiullina raised the bank's key interest rate to 20 per cent from 9.5 per cent on Feb 28 - 4 days after Russian forces entered Ukraine - but trimmed it to 17 per cent on Apr 8.

On Monday she signalled she would seek to cut it further.

"We must have the possibility to lower the key rate faster," Nabiullina said. "We must create conditions to increase the availability of credit for the economy."

She also said Moscow plans to take legal action over the blocking of gold, forex and assets belonging to Russian residents, while adding that such a step would need to be painstakingly thought through.

Foreign sanctions have frozen about US$300 billion of around US$640 billion that Russia had in its gold and forex reserves when it launched what it calls its "special military operation" in Ukraine.

Sanctions had until now mainly affected the financial market, "but now they will begin to increasingly affect the economy," Nabiullina said.

"The main problems will be associated with restrictions on imports and logistics of foreign trade, and in the future with restrictions on exports."

She said Russian companies would need to adapt: "Russian manufacturers will need to search for new partners, logistics, or switch to the production of products of previous generations." REUTERS