© Reuters.

(Bloomberg) — The Bank of Russia cut interest rates by the most in five years and signaled another reduction is likely to help stimulate an economy heading toward a deep recession.The benchmark interest rate was cut 100 basis points to 4.5%, the lowest level since inflation-targeting began in late 2014, the central bank said in a statement on Friday. Policy makers warned that a slump this quarter could be worse than expected and inflation could “significantly deviate” from a 4% target next year.

“If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings,” the bank said.

A majority of analysts in a Bloomberg survey forecast the move, while a handful had expected a smaller reduction. Five-year government bond yields fell the most in more than a month to trade near a record low and the ruble largely held onto gains.

Governor Elvira Nabiullina will hold a news conference at 3 p.m. Moscow time Friday.

After years of keeping borrowing costs in Russia relatively high, Nabiullina turned dovish earlier this year as the economy of the world’s biggest energy producer took a double hit from the coronavirus pandemic and slump in oil prices. Government bonds have rallied in recent months in expectation of deeper rate cuts.

The economy is forecast to contract by 5.5% in 2020, almost double the global rate, while a recovery next year will be slower than elsewhere, according to the International Monetary Fund. The central bank has said the economy may shrink as much as 6% this year.

Inflation was at 3.1% in mid-June, the bank said, and a recent slump in consumer demand due to Russia’s coronavirus lockdown is likely to add to disinflationary pressures. A 13% surge in the ruble against the dollar this quarter will also curb price growth, the central bank said Friday.

What Our Economists Say:

“With price pressure so weak, the central bank is likely to ease further. Another move could come as soon as July, though on a smaller scale.”

–Scott Johnson, Bloomberg Economics

Economists at Citibank in Moscow said last month that Russia could end up cutting the rate as low as 3%, without specifying timing. Bank of America Merrill Lynch (NYSE:) was less dovish, forecasting 3.5%.

The rate reduction may erode a carry trade that has kept Russia’s government bonds and currency attractive to foreign investors in recent years, though other emerging markets are also easing monetary policy and the Federal Reserve has pledged to keep rates near zero.

“The ruble remains one of the highest yielding emerging-market currencies,” said Piotr Matys, a strategist at Rabobank in London. “The central bank may have to intervene verbally in the coming days or weeks if today’s cut doesn’t dent the ruble’s bullish momentum sufficiently.”


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