The Russian central bank warns of a “large-scale structural” economic transformation.

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The Russian central bank warns of a “large-scale structural” economic transformation.

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Russian President Vladimir Putin chairs a meeting with Security Council members via video link at the Novo-Ogaryovo state residence outside Moscow, Russia, February 18, 2022.

Mikhail Klimentyev | sputnik | via Reuters

The Central Bank of Russia on Friday kept its monetary policy stable and kept the benchmark interest rate at 20%, but warned of considerable uncertainty as the economy is undergoing a “large-scale structural transformation”.

In late February, shortly after Russian forces invaded Ukraine, the CBR more than doubled the country’s key interest rate from 9.5% to 20% in an effort to bolster its free-falling currency. and mitigate the impact of harsh international sanctions.

In its statement on Friday, the CBR said the sharp hike in its key rate has “helped support 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 rising inflation, mainly related to the adjustment of relative prices on a wide range of goods and services.” , he has declared.

“The monetary policy of the Bank of Russia is intended to allow a gradual adaptation of the economy to the new conditions and a return of annual inflation to 4% in 2024”.

The ruble plunged to all-time lows against the dollar in the wake of a flurry of new sanctions and sanctions imposed on Moscow by the US and European allies, before moderating in recent weeks. The currency settled at just over 104 per dollar after Friday’s decision.

Earlier this week, Russia managed to avoid a historic debt default by completing some of its dollar sovereign bond payments, Reuters reported. The Russian finance ministry said Friday that it has fulfilled its obligations to pay coupons in full on dollar-denominated Eurobonds.

The large amounts of CBR’s foreign exchange reserves were targeted by Western sanctions which aimed to make them nearly inaccessible, preventing policymakers from mitigating the depreciation of domestic assets.

Three takeaways

Although the decision was expected, the central bank’s statement provided some insight into how it views the economic outlook for Russia at the moment.

William Jackson, chief emerging market economist at Capital Economics, said there are three key things, the first of which is that the central bank appears to think it has done enough with last month’s emergency hike to stabilize the financial system. and prevent a rush to Russia. banks.

“Second, the CBR sees sanctions and a Russian government shift towards autarchy and isolationism as something that’s here for the long haul,” Jackson said, noting that the statement mentioned the “structural transformation on large scale “on several occasions.

“And third, despite this, CBR policymakers are trying to maintain a semblance of macroeconomic orthodoxy. The main focus of the statement was on the balance of inflation risks and the fact that monetary policy would remain tight to avoid negative effects. second impact the current spike in inflation from taking hold. “

This could indicate that policymakers aim to lift current capital controls, revert to a floating ruble, and ultimately return the focus of monetary policy to the inflation target, Jackson suggested.

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