Russia cuts rates as the ruble hits a multi-year high

The Russian central bank cut the benchmark interest rate to 11%, from 14%, in a hastily organized meeting Thursday as politicians tried to support businesses and families in difficulty.

The bank is cutting interest rates faster than expected as the country’s currency rose rapidly, reaching its strongest level in four years against the US dollar this week.

Capital controls imposed by the central bank after the Russian invasion of Ukraine, particularly those that forced exporters to exchange their earnings for rubles, have increased the demand for Russian currency. The country large current account surplus, a measure of trade and investment flows, has been bolstered by high gains from oil and gas exports and a decline in imports, and keeps the ruble high. While the ruble’s strength has the benefit of easing inflation, it is also putting pressure on the country’s public finances as the budget is based on dollar-denominated oil export earnings.

The annual inflation rate in Russia rose to 17.8% last month, the central bank said, but is estimated to have declined slightly since then, faster than politicians expected.

“Capital controls are probably the main reason why the ruble has recovered and strengthened so much,” said Brendan McKenna, emerging market economist and currency strategist at Wells Fargo Securities. “It is really, really difficult right now to just buy US dollars and convert rubles into dollars or any other currency in Russia.”

In the days following the Russian invasion of Ukraine on February 24, the currency fell to its weakest level ever against the US dollar. The bank quickly raised its benchmark interest rate to 20% and imposed capital controls to limit the flow of money out of the country in an effort to prop up the currency. Since then, the ruble has strengthened and become the best performing currency in the world. This year it has risen by 25 percent against the dollar.

In the midst of the currency’s rapid rise, Russia loosened some of its capital controls. On Monday, the finance ministry said exporting companies just needed to do this exchange half of their foreign exchange earnings for rubles within 60 days. Previously, they had to trade 80%.

The central bank has room to cut interest rates as it focuses on stimulating an economic recovery. The bank previously predicted the economy would shrink by up to 10% this year as companies need to develop new supply chains with even fewer imported goods.

“External conditions for the Russian economy are still difficult, severely limiting economic activity,” the Russian central bank said in a brief statement Thursday. “The risks to financial stability have slightly decreased, allowing for a relaxation of some capital control measures.”

The bank has signaled that further interest rate cuts could come in upcoming meetings. The next political decision is scheduled for June 10th.

“When the currency is that strong, there is really no need for such a tight monetary policy,” McKenna said.