Why the Central Bank lowered the key rate: Nabiullina gave an answer

The fact that the Bank of Russia's Board of Directors has lowered the key rate for the first time in almost three years is symbolic in itself. However, it should not be viewed as the beginning of a easing cycle, as a turning point in the tight monetary policy. Rather, it is a one-time step that everyone has been waiting for for a long time and that will change little in the current economic situation in the country. A rate of 20% instead of the previous 21% is, in essence, nothing. The regulator made an absolutely expected tactical move.

The last time the decision to ease the monetary policy was made was in September 2022, when the Central Bank lowered the “key” from 8% to 7.5%. The rate of 21% was set at the meeting on October 25, 2024, when the regulator raised it from 19%. And it would not be a stretch to say that for many months the Bank of Russia was under pressure in this regard - and constantly increasing - from a variety of political, economic, and lobbying forces. For obvious reasons, not everything was made public. But what happened on June 6 is very similar to the final materialization of all sorts of wishes addressed - if not directly, then indirectly - to the Central Bank in May.

For example, a week ago, Finance Minister Anton Siluanov noted that "the slowdown in inflation in Russia in recent months has expanded the Central Bank's scope for making decisions on monetary policy. This includes reducing the key rate."

Earlier, Andrei Kostin, the head of one of the largest state banks, said that he was “willing to bet that the Central Bank rate will be lowered,” after which he suggested making a “bet on 10 clicks.” And in mid-May, President Vladimir Putin spoke about the soft landing of the Russian economy, adding that it was necessary to “clamp down on inflation so as not to freeze the economy itself.”

It is no coincidence that at Friday's press conference on the rate, Elvira Nabiullina was asked: "how much politics and how much economics" in the Central Bank's decision of June 6? The answer was predictable, it could not have been otherwise: "we proceed from our own analysis and our own risk assessment... If the Bank of Russia had given in to the so-called pressure, then the rate would probably have been much lower."

Nevertheless, it is difficult to discount a certain political and opportunistic context, reflected, in particular, in the question of which of the two goals is the primary one for the Central Bank – to slow down inflation or to allow the real sector to develop? The journalist who asked this question referred to the position of the “left wing of the State Duma”, according to which the regulator is unable to either slow down inflation or make money available to the economy.”

"What really hinders the development of the real sector, I am convinced of this, is high inflation," Nabiullina countered this thesis. "The growth of the general level of prices in the economy inevitably leads to the fact that companies have growing costs for materials, equipment, and labor costs. With high inflation, there are no affordable rates. Even if you reduce the key rate, real market rates will be high, there is no stable exchange rate of the national currency. It is difficult for companies to plan anything ahead, and this is very important for business. Ultimately, inflation eats up the potential of the economy, so our goal is to slow down inflation and allow the real sector of the economy to develop. These tasks do not contradict each other, moreover, they correspond to each other."

Elvira Nabiullina explained the Bank of Russia's decision to reduce the rate by 100 basis points by the fact that inflationary pressure, including stable inflation, continues to decline (annual inflation, according to estimates as of June 2, slowed to 9.8%). In addition, the economy is gradually returning to a balanced growth trajectory, although domestic demand continues to outpace the ability to expand the supply of goods and services. According to the head of the Central Bank, high rates have become one of the main factors in strengthening the ruble, and together with the cooling of demand, this has additionally affected the price dynamics in the non-food segment. "As a result, many household appliances and electronics, such as smartphones, televisions, and vacuum cleaners, have remained almost unchanged in price or have even become cheaper."

The price dynamics within the food product group appear uneven: for example, "milk and eggs have stopped rising in price after the jumps in previous months, prices for greenhouse vegetables are falling unusually quickly for this season, and, on the contrary, price pressure is growing in the meat group." As for the inflation expectations of the population, they fluctuate in the range of 13-14% for basic food products, transport, and household services. And this is one of the key factors that requires the Central Bank to be careful when making decisions.

According to the regulator, there are more signs of easing tensions on the labor market: in particular, the share of companies experiencing a shortage of personnel is decreasing. There is a tendency for the number of vacancies to decrease and salary offers to decrease in the most overheated segments, for example in the IT sector. Touching on external conditions, Nabiullina reported that the foreign trade surplus in March and April decreased slightly due to lower prices for key Russian export goods, such as metals and coal.

At the current press conference on the rate, unlike the two previous ones, the topic of geopolitics, the possible lifting (easing) of anti-Russian sanctions and the influence of the "Trump factor" on the Russian economy were completely absent. The reason is obvious: judging by the latest news, the armed conflict has entered the escalation stage, and the US President himself has sharply reduced his peacekeeping efforts.

However, the question related to the current exchange rate was raised more than once. The MK correspondent referred to experts who believe that the ruble is overvalued, point to the growing budget deficit and claim that in order to reduce it, financial departments may begin to reduce the national currency rate: "Does the Central Bank agree with this, and is it discussing such a scenario with the Ministry of Finance?"

"The Bank of Russia does not discuss any target exchange rate levels with the Ministry of Finance, since the exchange rate in Russia is floating," Nabiullina categorically stated in response. "Only a floating exchange rate allows us to conduct an independent monetary policy. It works as a built-in stabilizer for the economy. Therefore, the ruble exchange rate can only be considered as one of the indicators in the macroeconomic forecast, but not as a target variable. The formation of the exchange rate is not dictated by budget needs, it is determined by the balance of supply and demand for currency on the domestic market - this is the essence of a floating exchange rate. This rate can be influenced by external conditions: prices, volumes of demand for our main export goods, the geopolitical situation."

To summarize all that has been said: the Central Bank will maintain the monetary policy strictness that is necessary to return inflation to the target of 4% in 2026. That is, if we believe Elvira Nabiullina (and put aside the political context), the regulator may well raise the rate at one of the next meetings.