Tuesday , 21 May 2024
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Global Economy

Hard fight against recession

Russia's central bank lowered the key interest rate today by one and a half points to 8.0 percent. It was already the fourth step down this year. Experts polled by Reuters had only expected a drop to 9.0 percent. The central bank intends to examine in the further course of the year whether further easing steps are necessary. The environment for the domestic economy remains "challenging" and weighs heavily on the economy, the central bank said.

In order to prevent the national currency ruble from falling, the currency watchdogs led by Central Bank chief Elvira Nabiullina initially raised the interest rate from 9.5 to 20.0 percent after the invasion of Ukraine, but then lowered it further and further.

Where does the ruble strength come from?

Currently, however, the ruble is stronger than before the attack on Ukraine, also due to significant capital restrictions imposed by Moscow. According to experts, this is not a sign of economic strength. The strength of the ruble is due to the fact that the sum of energy and raw material exports far exceeds the value of imports due to Western sanctions.

Because of the massive trade surplus and high energy prices, there is little demand for foreign currencies, which in turn strengthens the ruble – an artificial strength. In addition, some of the energy supplies have to be paid for in rubles, which means that there is also demand for the national currency.

recession in Russia

The Russian economy has long been in crisis mode: According to the central bank's forecast, gross domestic product will shrink by four to six percent this year. The recession is expected to continue in 2023, albeit to a lesser extent. The invasion of Russian troops into Ukraine at the end of February and the subsequent sanctions imposed by the West are affecting Russia's economy.

At the same time, the central bank expects the strong upward pressure on prices to gradually subside: annual inflation of twelve to 15.00 percent is expected for this year, which will fall to five to seven percent in 2023. For 2024, the central bank is expected to reach its inflation target of four percent again. In the middle of the month, inflation in Russia was 15.5 percent.

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