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Russia’s central bank Friday lowered its key interest rate below its prewar level, and said it expects the economy to contract less sharply than it did when Western sanctions were first imposed in response to the invasion of Ukraine.
The Bank of Russia lowered its key rate to 8% from 9.5%, the level it stood at before the late-February invasion of the country’s southern neighbor. The central bank’s first move as sanctions were rolled out and the ruble slumped was to more than double the key rate, but a rebound in the currency opened the way for a sequence of cuts.
The central bank said it might cut its key rate further.
“The potential for further reductions remains,” Bank of Russia Gov.
Elvira Nabiullina
told reporters after the rate move.
Russian officials said sanctions were weakening the economy, but to a lesser degree than they had initially anticipated. They said the economy is likely to contract between 4% and 6% this year, having forecast in April a decline in output of between 8% and 10%. But it said the contraction will extend into next year, when gross domestic product could fall by as much as 4%.
“The economic decline will be more extended over time,” Ms. Nabiullina said.
Russia’s factories have been hobbled and output has fallen since the invasion, particularly in the automobile industry, where production was slightly more than a third of its level a year earlier in May. However, a survey of businesses conducted by S&P Global indicated that the services sector returned to growth in June after three months of contraction.
Higher prices for oil and natural gas have helped support the economy, and combined with plunging imports to boost the ruble. While Western governments have announced plans to stop buying Russian oil, alternative buyers have been found, while Europe continues to purchase large quantities of natural gas.
“The situation doesn’t seem to be as bad precisely because the sanctions on Russian oil and gas don’t seem to be as tough as they were expected to be a couple of months ago,” said Sergei Guriev, a Russian economist at Sciences Po in Paris.
The central bank lowered its forecast for inflation this year to between 12% and 15%, from 18% to 23% previously, largely reflecting the ruble’s rebound since it last released projections in April. The country’s annual rate of inflation jumped to 16.7% in March from 9.2% in February, but was 15.9% in June.
Write to Paul Hannon at paul.hannon@wsj.com
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