IMF urges Russia to cut interest rates in 2021

MOSCOW: Russia should consider cutting its key interest rate by 50 basis points this year to prevent inflation sliding below the central bank's 4% target, the International Monetary Fund said on Tuesday.

The central bank slashed rates to a record low last year and is seen holding its key rate at 4.25% this Friday, with accelerating inflation and a weak rouble limiting room for further monetary easing, a Reuters poll has showed.

The central bank expects inflation, which sped up to 5.2% in January, to peak in February. The IMF put the currently above-target inflation down to short-term pressures caused by the weak rouble, but said it expected inflation to fall to 3.5% by end-2021 without monetary easing.

"The Bank of Russia should lower rates in the coming months to prevent inflation from sliding below target over 2021," the IMF said in a report after regular consultations with Russian authorities.

In order to better respond to future shocks, the IMF said lowering the key rate to 3.75% was needed this year, even though this carried inflationary risks.

When asked about risks of a reversal of the monetary cycle and possible rate increases, IMF Mission Chief for Russia Jacques Miniane said it would be premature at this stage.

The IMF said it saw Russia's economy growing by around 3.0% this year, assuming that "a COVID-19 vaccine becomes widely available in the second half of 2021 in Russia and its trading partners, allowing for a rebound in domestic demand and exports".

In November, the IMF predicted the Russian economy would grow by 2.5% in 2021.

"It would be a mistake to think we are out of the woods," Miniane told an online media briefing, citing existing lockdown measures in some of Russia's key trading partners and the fragile economic situation.

The IMF forecast is in line with that given in October by the Russian central bank, which expects the economy to grow by 2.5-3.5% in 2021. The bank will present a new set of forecasts on Friday.