Russia’s Central Bank chief under pressure to cut interest rates amid economic strain of war, sanctions

Russia’s central bank governor, Elvira Nabiullina, is under growing pressure from the Kremlin to cut interest rates as businesses struggle with record-high borrowing costs and signs of economic strain outside the military sector mount.

Government officials expect Nabiullina to lower the benchmark rate soon, possibly as early as Friday’s central bank meeting, Bloomberg reported, citing three people familiar with internal discussions.

The shift in tone marks a reversal from last November, when Finance Minister Anton Siluanov supported rate hikes to combat soaring inflation. Nabiullina, 61, was credited with stabilising the economy in the wake of Russia’s 2022 invasion of Ukraine, deploying capital controls and other measures to stave off collapse. She continues to enjoy the support of President Vladimir Putin.

But the central bank’s key interest rate has stood at 21 per cent since October, aimed at taming inflation that peaked above 10 per cent late last year, well above the 4 per cent target. That policy has helped cool inflation, with the seasonally adjusted annualized rate falling to 6.2 per cent in April, down from 10.7 per cent in January, according to a central bank report published May 27.

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Still, economists warn the drop in inflation may not be stable, as it has largely been driven by a stronger ruble. “The challenge for the central bank now lies in choosing between two risks,” said Olga Belenkaya, head of macroeconomic analysis at Finam in Moscow. “Keeping the rate unchanged risks a recession, while a cut could reignite inflation.”

High interest rates are already squeezing large parts of the economy. Industrial firms, especially those not tied to military production, are scaling back investment. Severstal PJSC, one of Russia’s largest steelmakers, posted a negative cash flow of 33 billion rubles ($421 million) in the first quarter, compared to a positive figure of the same amount a year earlier.

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The company said the high cost of borrowing has delayed customer projects and forced it to rely on cash reserves to fund operations. Severstal said a rate cut to at least 15 per cent would be necessary to normalise conditions.

Dozens of major firms have cancelled dividend payments for 2024, and broader signs of a slowdown are emerging. Civilian goods production fell 0.8 per cent monthly during the first quarter, hitting its lowest level since April 2023, according to an April report by the Center for Macroeconomic Analysis and Short-term Forecasting in Moscow.

Adding to economic pressure, revenues from oil and gas exports are slipping amid lower global crude prices and a stronger ruble. Authorities have already revised budget forecasts and more than tripled the fiscal deficit target.

To ease the burden on struggling businesses, the central bank last month recommended that lenders restructure loans and temporarily lowered reserve requirements on restructured credit.

As officials push for rate relief, the central bank faces a delicate balancing act between supporting growth and keeping inflation in check. All eyes are now on Friday’s decision.