Russian central bank eyes rate cut, warns of structural changes to economy By Reuters

© Reuters. FILE PHOTO: A Russian state flag flies over the Central Bank headquarters in Moscow, Russia March 29, 2021. A sign reads: "Bank of Russia". REUTERS/Maxim Shemetov/File Photo

(Reuters) -Russia's central bank will consider cutting its key interest rate further at upcoming board meetings, Governor Elvira Nabiullina said on Thursday, flagging economic challenges the country faces as it tries to blunt the impact of Western sanctions over Ukraine.

Nabiullina also said Russia is looking at adjustments to its foreign exchange controls to avoid situations where the rouble exchange rate deviates on a shadow market from official levels.

As she begins her new five-year stint in charge of monetary policy, Nabiullina will have to deal with a full-scale economic crisis, tackling uncertainty stemming from Western sanctions.

The central bank's emergency rate hike to 20% in late February helped stabilise the rouble and overcome a spike in inflation, Nabiullina said. The bank then cut the interest rate to 17% on April 8. Its next board meeting is on April 29.

"We will consider the possibility of its further reduction at upcoming meetings," Nabiullina said, speaking in the lower house of parliament, the Duma. She did not say if a cut was likely at next week's meeting.

Andrei Kostin, head of Russia's second-largest lender VTB, which is targeted by Western sanctions, said on Thursday he expected the central bank to cut the key rate to 15% this month and to 12-13% by the end of the year, TASS news agency reported.

Inflation in Russia now stands at 17.6% and is on track to accelerate to 22% this year, while the economy is set to shrink by 9.2% in 2022, according to a poll of economists conducted by the central bank in April.

Nabiullina warned that Russia, which saw its strongest economic growth in 13 years in 2021, at 4.7%, will now undergo structural changes as its access to the global financial system and trade is limited by tough Western sanctions.

"Problems may arise even when there is a production with a high degree of localisation, when there has already been a fairly high import substitution," Nabiullina said.

For example, she said, Russia produces its own paper but uses foreign bleaching agents, or urgently needs foreign-made packing materials for food stuff produced in Russia.

"It all takes time," she said.

The country is facing capital flight while grappling with a possible debt default after the West imposed sanctions on banks, businesses and individuals following what Moscow calls a "special military operation" in Ukraine.

Nabiullina also said Russia aims to extend the number of countries that accept Russia's Mir banking cards, an alternative to VISA and MasterCard which have joined other Western firms and suspended their operations in Russia.

Mir and China's UnionPay are among the few options left for Russians to make payments abroad since Russian banks were isolated from the global financial system as part of the sanctions.

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