© Reuters. FILE PHOTO: A general view of the Kyiv train station and the skyscrapers of the Moscow City Business Center in Moscow, Russia, on April 29, 2022. REUTERS/Maxim Shemetov/File Photo
(Reuters) – Russia’s economy will contract less than expected this year and inflation will be lower than previously expected, a Reuters poll showed on Tuesday, after what Moscow called a “special military operation” in Ukraine entered the fourth month.
Russia’s export-dependent economy is set to plunge into recession after Moscow deployed tens of thousands of troops to Ukraine on February 24, prompting wide-ranging Western sanctions against Russia, including a partial freeze of its reserves.
Median forecasts from 18 analysts polled at the end of May indicated that the Russian economy would contract 7.6% this year. A similar survey in late April forecast the economy would contract 8.4%.
Expectations are gradually improving as officials revise their expectations. A presidential adviser said in early May that the economy would shrink by no more than 5% in 2022, weeks after the Commerce Department said GDP was on track to contract by more than 12%, in what would be the biggest drop in GDP since then. . following the collapse of the Soviet Union.
The flat deflation may be the result of less restrictive monetary policy as inflation is below levels that officials and economists feared would accelerate in Russia’s early days in Ukraine.
Full-year inflation is now expected to accelerate to 16.4% from 8.4% in 2021, but well below last month’s forecast which was for an annual increase in CPI of 20.5%.
That could give the central bank room to cut interest rates to 8.0% by the end of the year, compared to 10.5% in the previous survey. The central bank targets 4% inflation.
Recently, the central bank cut interest rates by 300 basis points to 11% in an unscheduled meeting in May ahead of its June 10 rate-setting meeting.
The slowdown in inflation was driven by sluggish domestic consumer demand coupled with the rapid appreciation of the ruble. This, in turn, is driven by capital controls and Russia’s record current account surplus due to the rising prices of its commodity exports and the rapid decline in imports.
But market expectations are changing rapidly in the current volatile and unpredictable environment, driven in large part by geopolitical factors, and the ruble may weaken sharply later this year.
The ruble is expected to trade at 77.80 to the dollar a year from now, compared to the 83.50 rate that analysts had expected at the end of April. On Tuesday, the official rate was 63.10 rubles to the dollar.