Russian macro: abrupt economic deceleration prompts CBR’s decisive action
In mid-May, Rosstat published its preliminary estimate of 1Q25 GDP growth of 1.4% y-o-y. In the aftermath of last year’s 4.3%, growth the 1Q25 number was not only unimpressive but also largely unexpected as public spending once again massively increased at the very end of December 2024, implying stimulus for January-February 2025. However, this didn't have much effect, as January’s statistics pointed to a sudden lack of domestic demand. On top of that, a number of other distortions emerged, such as the massively increased volatility of the ruble, followed by its sudden rapid appreciation. Rosstat’s recent statistics on the 4M25 performance of the five basic sectors (the flash estimate of economic activity in the industry, agriculture, construction, transportation, and trade sectors), which grew y-o-y by 2.0% in April and 1.6% in 4M25, also look unimpressive. The 4M25 economic trends raised concerns for the investor community questioning the sustainability of a growth model that relies on permanent and substantial increases in government spending, which appears inflationary, forces the CBR to keep policy rates high, and trims credit growth.
Hence the CBR’s recent decision to cut the key rate by 100 bps to 20% was reasonable but insufficient as it may not fix the distortions that have emerged, such as an excessively strong ruble, lack of budget revenues, compressed consumer demand, and others. The recent key rate cut served more as a symbolic move than a real action. Ideally, to return to more reasonable GDP growth rates (say, above 3%), the key rate should be brought down by at least another 500 bps by the end of this year. This could be possible as inflation will continue to slow—assuming other factors remain equal. However, if the government continues to inflate federal budget revenues in the same fashion as in recent years (i.e., massively upwardly amending them on a regular basis), then the solution won’t be easy, as inflation will remain elevated, and the CBR’s room for maneuver will be limited. The economy won’t grow unless the key rate is cut meaningfully.
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