UPDATE 2 - Russian central bank cuts key rate to 8%, borrowing costs below pre-war level

ADDS DETAILS, REVISES HEADLINE, REMARKS FROM GOVERNOR

By Aysu Bicer

ANKARA (AA) - Russia's central bank cut its key interest rate by 150 basis points to 8% in July, well above market forecasts for a smaller reduction of 50 basis points and it brought interest rates below pre-war level.

Following the decision, the ruble lost value against the greenback by as much as 2.6%.

"The external environment for the Russian economy remains challenging and significantly constrains economic activity," the Bank of Russia said in a statement.

Yet, it said the decline in business activity is slower than the bank expected in June.

"Current consumer price growth rates remain low, contributing to a further slowdown in annual inflation," it underlined.

In June, Russia's annual inflation diminished to 15.9% after 17.1% in May.

According to the central bank's forecast, annual inflation will go down to 12-15% in 2022, to 5-7% in 2023, and return to 4% in 2024.

Monetary conditions continued to ease, but generally remained tight as inflation expectations declined, it said.

Pointing out that movements in the economy and inflation largely depend on fiscal policy decisions, the bank said that it had taken into account measures that were already in force related to the mid-term expenditure path of the federal budget and the fiscal system as a whole.

It said that in case of "further budget deficit expansion," tighter monetary policy may be required to return inflation to the 2024 target and keep it close to 4%.

Meanwhile, bank's Governor Elvira Nabiullina told reporters in Moscow that incoming data indicates that the economic downturn will be more prolonged in time and possibly less deep.

The bank chose the deepest rate cut, she said.

"The economic situation depends on how companies adjust to the changing conditions. This adjustment is very uneven across regions, industries and even individual companies within the same sector," she underlined.

Noting the strength of the ruble has influenced the perception of prices and household attitudes toward purchases, she said: "This is evident from changes in inflation expectations. In July, they have edged down to 10.8%, which is the lowest level since March 2021."

"People believe that current prices for many goods are unreasonably high and are waiting for their reduction. Companies’ short-term price expectations continue to decline," she said.