Russian central bank slashes key rate to 8%, to study need for more cuts

MOSCOW (Reuters) -Russia's central bank cut its key interest rate by a bigger-than-expected 1.5 percentage points to 8.0% on Friday and said it would study the need for more cuts as inflation slows and an economic contraction continues for longer than previously thought.

It was the fourth cut this year. In the immediate aftermath of Moscow's despatch of armed forces into Ukraine on Feb. 24, the central bank had hiked its key rate to 20% from 9.5% in order to reverse a plunge in the value of the rouble.

Central Bank Governor Elvira Nabiullina said the board had considered three main options: cutting the rate by 50, 100 or 150 basis points, as it aims to bring annual inflation down to its 4% target in 2024, compared with 15.5% recorded in mid-July.

"The potential for further rate decrease remains on the mid-term horizon," Nabiullina told a media conference as she presented the rate move.

The rouble extended losses, sliding to 58.65 against the dollar after the rate decision, from 57.57 seen shortly before.

"The Bank of Russia has surprised not only us but the entire financial market", said Yuri Tulinov, senior vice-president of market studies at Rosbank.

In a Reuters poll earlier this week, most analysts had expected a cut of 50 basis points from 9.5%.

Lower rates ease upside pressure on the rouble, while making lending cheaper, which Russia needs to limit the depth of its economic recession triggered by sweeping western sanctions.

"The data we are receiving suggest that the economic decline will be more extended over time and, possibly, will become less deep," Nabiullina said.

After growing 4.7% in 2021, the economy is now on track to shrink 4%-6% this year, the central bank's revised forecasts showed. In late April, it had said GDP would shrink 8%-10%.

WHAT'S NEXT?

In 2023, the economy will contract by 1%-4%, the central bank said, revising its earlier forecast that the economy would shrink by up to 3% next year.

"The CBR is telling a story with its economic forecasts. This story is that the environment could deteriorate next year to the extent that it would force the CBR to hike the policy rate," said Alexei Pogorelov, chief economist at Credit Suisse in London.

High inflation dents living standards and has for years been a key concern for ordinary Russians. Annual inflation will slow to 12%-15% this year and to 5%-7% in 2023, the central bank said.

The central bank could lower the key rate by 7% by the year-end, said Yuri Popov, strategist at SberCIB Investment Research.

The central bank noted subdued consumer demand, weak investment activity and issues with Russia's external trade.

The central bank said the key rate would average 6.5-8.5% in 2023 and said it was ready to act if inflation accelerates again.

"This approach also shows the central bank has no euphoria about the resilience of the domestic economy to Western sanctions and that it prefers staying on the safe side," said Pogorelov from Credit Suisse.

(Reporting by Reuters; Editing by Kevin Liffey and Catherine Evans)