Russia’s central bank has signalled it may cut its benchmark rate next week to the lowest since the collapse of the Soviet Union but even that would only have a limited direct impact on the economy’s post-pandemic recovery, analysts say.
With its benchmark rate at 5.5%, the Bank of Russia has far more leeway to cut than counterparts in major Western economies where rates are already close to zero or even negative.
But analysts doubt whether even a 100 basis point cut would result in a jump in the broad-based borrowing needed to get the economy going, with gross domestic product expected to shrink by up to 6% this year because of the fallout from the coronavirus.
“There’s not much possibility for the population to take on more debt because of the cap on real income growth and there’s not much demand from the real economy from businesses,” said Vladimir Tikhomirov, chief economist at BCS Global Markets.
Governor Elvira Nabiullina has hinted at a 100 basis point cut on June 19, which would be the biggest single reduction since June 2015.
Analysts polled by Reuters forecast a 50 basis point cut, with further easing by the end of the year.
It’s a far cry from the Russian crises of 2008/09 and 2014/15 when a toxic combination of economic contraction and booming inflation forced the central bank to push rates sharply higher in a bid to support the rouble.
This time inflation is just 3% and real disposable incomes are now projected to shrink by 3.8% in 2020, rather than growing by 1.9% as previously expected, according to the economy ministry.
“The carry-on effect of the rate cut to the economy is likely to be very marginal, very, very small. It won’t be a game-changer for the economy at large,” said Tikhomirov, questioning whether banks would even pass on the cut to customers as their profits had been hit by the pandemic.
BOOST FOR PUTIN PROJECTS?
The central bank’s credibility has grown over the past few years under Nabiullina. A year after she become governor in 2013, the bank went through a torrid time and had to raise its key rate by 650 basis points to 17% in December 2014 to rescue the rouble, just after adopting a free-floating currency regime.
That year, the bank burned through nearly $80 billion to prop up a currency hit by weak oil prices, Western sanctions against Russia over the annexation of Crimea and the impact of companies needing to repay debt denominated in foreign currency.
But interest rates have been on a generally downward trajectory ever since and the central bank cut its key rate by 50 basis points in April to the lowest since the start of 2014.
A 100 basis point cut next week would take it down to 4.5%, which would be lowest since the collapse of the Soviet Union at the end of 1991.
Nevertheless, Dmitry Polevoy, chief economist at the Russian Direct Investment Fund, said a move to a policy of bigger cuts would not have an immediate impact as it takes time for changes in monetary policy to filter through to the real economy.
Even cheap loan schemes that have been made available by the government and banks to cushion the fallout from the pandemic have failed to dramatically stimulate spending so far, analysts say.
A policy shift to bigger rate cuts is also not without risks. It could backfire if inflation starts to accelerate faster than forecast, said Ivan Tchakarov, chief economist at Citi for Russia, Ukraine and Kazakhstan.
Lower rates could also hit the rouble and lead to more modest returns on governments bonds, or OFZs, which have been snapped up by foreign investors but are already becoming less attractive because of recent rate cuts.
One significant benefit of a cut, however, would be to make cheaper money available to the state as it emerges from its lockdown and President Vladimir Putin pushes ahead with $400 billion of economic and social spending on national projects.
“It is money, it is blood for the economy,” Yury Borisov, a deputy prime minister, said last month of the expected rate cut.