Russia's economic contraction, subdued inflation suggest more rate cuts likely in 2020

MOSCOW (Reuters) - Russia will continue cutting interest rates this year from already record-low levels as it faces a worsening economic contraction and subdued inflationary risks, according to a poll of economists and analysts released by Reuters on Tuesday.

Lockdowns in Russia designed to slow the spread of the novel coronavirus have pummelled economic activity since late March, prompting the central bank to switch to accommodative monetary policy to support the economy through cheaper lending.

The consensus forecasts of 22 analysts and economists suggested gross domestic product will contract 4.5% in 2020 before growing 3.2% in 2021.

A month ago, when the scale of the economic crisis was less clear, a similar poll showed the economy would shrink by 3.8% this year.

The biggest contraction of 9% year-on-year is expected in the second quarter, followed by a 5.5% drop in the third, 3.7% in the fourth and 1.8% in the first quarter of 2021.

While the broader economy will contract this year, some of its components are expected to recover as Russia lifts coronavirus-related restrictions.

“We expect a pronounced improvement in consumer demand in June, followed by a recovery in services (which contracted by circa 40% year-on-year in April-May) amid the faster easing of quarantine restrictions,” Renaissance Capital said in a note.

The central bank is expected to support consumer demand with cheaper loans after it slashed its key rate by 100 basis points to an all-time low of 4.5% in June.

In July, the central bank will cut the rate to 4.25%, bringing it to 4.0%, the level of its inflation target, by the year-end, the poll anticipates. The previous monthly poll foresaw the rate at 4.5% by year-end.

Inflation is now seen finishing this year at 3.7%, down from 4.2% in the late-May poll.

Most of the forecasts in the Reuters poll were based on at least 10 individual projections.

The rouble outlook against the U.S. dollar was largely unchanged and worsened versus the euro. The rouble was expected to trade at 69 to the dollar and 80.15 to the euro 12 months from now. The previous poll foresaw exchange rates of 70 and 75.80, respectively.

A decline in global risk appetite amid risks of a second coronavirus wave along with slower liquidity injections by major central banks will hamper the rouble’s appreciation, Bank St Petersburg said.

On Tuesday, the rouble’s official exchange rates, set by the central bank, were 69.95 per dollar and 78.68 per euro.

Writing by Andrey Ostroukh; Editing by Peter Graff