May 20, 2022
Elvira Nabiullina, head of Russia's central bank

Russia has flagged a further reduction of interest rates and increased budget spending, as the economy faces its deepest contraction since 1994 in the wake of western sanctions.

The sanctions put in place following Russia’s invasion of Ukraine have seen inflation soar, and the country faces a battle to avoid defaulting on its debt. The World Bank expects the Russian economy to shrink by more than 11% this year.

The Russian central bank increased its key interest rate by more than 100% following the first wave of sanctions, hiking the rate to 20% on February 28th. The bank has since dropped the rate to 17% and is expected to announce a further reduction at the next board meeting on April 29th.

Vladimir Putin has said that Russia should use its state budget to support the economy.

The central bank more than doubled its key interest rate to 20% on Feb. 28 as the first wave of sanctions hit, before trimming it to 17% on April 8. It is expected to lower it further at the next board meeting on April 29th.

Central Bank Governor Elvira Nabiullina, speaking at the lower house of parliament, said that the bank must “create conditions to increase the availability of credit for the economy”, making it clear this did not indicate a willingness to reduce the rate by any means necessary.

“We will not try to lower it by any means – this would prevent business from adapting,” she added.

Russian inflation hit 16.7% in March, the highest rate since 2002. The current spike is the result of low supply rather than high demand, Nabiullina said, and the central bank remains on course to achieve its 4% target by 2024 as the economy adapts to the new geopolitical landscape.

“The period when the economy can live on reserves is finite. And already in the second and third quarter we will enter a period of structural transformation and the search for new business models,” she said.