Russia significantly reduced the cost of borrowing on Friday, the latest sign of the country’s economic slowdown.
Russia’s Central Bank cut the benchmark interest rate by two percentage points, to 18 percent, during a regular meeting. In June, falling inflation had persuaded the bank, which maintains some independence in an authoritarian political system, to begin relaxing the highest borrowing costs in Russia’s history, lowering rates by one percentage point for a total of three points in two months.
A boom in wartime spending since Russia’s invasion of Ukraine had sharply increased inflation, which peaked at about 10 percent earlier this year. The central bank tried to cool the demand by raising interest rates in October to 21 percent, its highest level since 1991.
Many officials and business leaders said the central bank’s governor, Elvira Nabiullina, had gone too far, accusing her of suffocating investment by making loans unaffordable. Ms. Nabiullina held steady until June, when she said that economy had cooled enough to begin relaxing interest rates.
“The growth of internal demand is slowing,” Ms. Nabiullina told reporters on Friday. She added that Russia’s wartime labor shortages were also easing, another indication of slower economic growth.
The central bank has forecast that a combination of falling oil revenue and internal economic imbalance will reduce Russia’s economic growth to 1 to 2 percent this year, from 4.3 percent in 2024. The country’s economic outlook faces further threats this year from President Trump’s trade wars, which are reducing global demand for oil and other Russian commodity exports, such as coal.
The bank said Russia’s inflation fell to a seasonally adjusted 4.8 percent in the second quarter of this year, from 8.2 percent in the first quarter. Annualized inflation stood at 9.2 percent by July 21, it said.
It has characterized the current economic slowdown as a manageable return to what it terms Russia’s “balanced growth trajectory.”
Ms. Nabiullina’s critics and many economists believe the slowdown is a prelude to stagflation, when an economy and employment stop growing but prices continue to rise.
Analysts believe Russia’s slowing economic growth caused by the effects of war and sanctions is unlikely to affect the Kremlin’s ability to wage war in Ukraine for the foreseeable future, but further declines in oil prices may lead Moscow to reduce spending in other areas, such as social benefits and infrastructure.
Anatoly Kurmanaev covers Russia and its transformation following the invasion of Ukraine.
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