Russia central bank warns of ‘large-scale structural transformation’ for economy, holds rates at 20%

  In late February, shortly after Russian forces invaded Ukraine, the Central

  Bank of Russia more than doubled the countrys key interest rate from 9.5% to

  20% in an effort to prop up its plunging currency.

  In its statement Friday, the CBR said the sharp increase in its key rate had

  “helped sustain financial stability.”

  The Central Bank of Russia on Friday held its monetary policy steady and

  maintained its key interest rate at 20%, but warned of considerable uncertainty as

  the countrys economy undergoes a “large-scale structural transformation.”

  In late February, shortly after Russian forces invaded Ukraine, the CBR more than

  doubled the countrys key interest rate from 9.5% to 20% in an effort to prop up its

  plunging currency and mitigate the impact of tough international sanctions.

  In its statement Friday, the CBR said the sharp increase in its key rate had helped

  sustain financial stability.

  The Russian economy is entering the phase of a large-scale structural

  transformation, which will be accompanied by a temporary but inevitable period of

  increased inflation, mainly related to adjustments of relative prices across a wide

  range of goods and services, it said.

  The Bank of Russias monetary policy is set to enable a gradual adaptation of the

  economy to new conditions and a return of annual inflation to 4% in 2024.

  The ruble sank to record lows against the dollar on the back of a barrage of new

  sanctions and penalties imposed on Moscow by the U.S. and European allies, before

  Earlier this week, Russia managed to stave off a historic debt default by completing

  some of its sovereign bond payments in dollars, Reuters reported. The Russian

  Finance Ministry said Friday that it had met its obligations to pay coupons on dollardenominated eurobonds in full.

  The CBRs large quantities of foreign currency reserves were targeted by Western

  sanctions that aimed to render them almost inaccessible, preventing policymakers

  from mitigating the depreciation in domestic assets.

  While the decision was expected, the central banks statement gave some insight into

  how it views the economic outlook for Russia at present.

  William Jackson, chief emerging markets economist at Capital Economics, said there

  were three key takeaways, the first of which was that the central bank seems to think

  it has done enough with last months emergency hike to stabilize the financial system

  and prevent a run on Russian banks.

  Second, the CBR sees sanctions and a shift by the Russian government towards

  autarky and isolationism as something that is here for the long haul, Jackson said,

  noting that the statement mentioned the “large-scale structural transformation” on

  several occasions.

  And third, despite that, policymakers at the CBR are trying to maintain a semblance

  of macroeconomic orthodoxy. The over-riding focus of the statement was on the

  balance of inflation risks and that monetary policy would remain tight to prevent

  second-round effects from the current inflation spike from taking hold.

  This may indicate that policymakers aim to roll back the current capital controls,

  revert to a floating ruble and return the focus of monetary policy to inflationtargeting eventually, Jackson suggested.

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