Russia to slash rates by year-end as rouble recovers

© Reuters. FILE PHOTO: Russian 100-rouble banknotes are placed on a cashier's desk at a supermarket in the Siberian town of Tara in the Omsk region, Russia, December 14, 2021. Picture taken December 14, 2021. REUTERS/Alexey Malgavko/File Photo

(Reuters) - Russia's inflation this year could be lower than previously expected thanks to a recovery in the rouble, which should give the central bank room to cut interest rates amid a full-scale economic crisis, a Reuters poll showed on Friday.

Russia's export-dependent economy is plunging into recession after Moscow sent tens of thousands of troops into Ukraine on Feb. 24 in a move that triggered sweeping Western sanctions against Russia, including a partial freeze of its reserves.

The rouble's crashed to record lows after Russia started what it calls "a special military operation" in Ukraine. But capital controls have helped the rouble fully recoup losses and even to firm versus the euro to levels last seen in early 2020.

The average forecast among 18 analysts polled in late April suggested the rouble would trade at 83.50 against the dollar a year from now, compared with a rate of 97.50 predicted by analysts in late March. Friday's official rate was at 72.30 roubles per dollar. [L5N2VY6QY]

With capital controls in place, the rouble rate is determined by Russia's strong current account surplus as its exports exceed imports, which suggests the rouble could continue firming, MKB Investments analysts said.

That should help cap inflation, one of the key concerns among Russians, though it is still on track to post its highest reading since 1999, posing a clear threat to living standards.

In 2022, inflation is expected to accelerate to 20.5% from 8.4% in 2021, the poll showed. In late March, analysts had on average predicted 2022 inflation at 23.7%, far above Russia's 4% target and January's poll results that foresaw this year's inflation at 5.5%.

Market expectations change quickly in the current volatile and unpredictable environment, which is driven to a large extent by geopolitical factors.

The central bank raised its key interest rate to 20% in late February in an emergency move, but earlier in April it trimmed it to 17%. It is expected to lower rates again on Friday.

The central bank has explicitly said it will consider cutting rates at upcoming meetings, which analysts interpreted as an indication that the key rate could fall to 10.5% by year-end, the latest poll showed. A month ago, the rate was seen ending this year at 16%.

Lower rates should make lending more affordable, which is crucial for an economy that is on track to shrink by 8.4% this year, the poll showed. A similar poll in early 2022 predicted economic growth of 2.5%.

The Russian economy ministry is less optimistic as it forecasts a 12.4% contraction in its conservative scenario, which would be the biggest decline in gross domestic product since 1994.