Russia’s central bank cut interest rates to 9.5 per cent on Friday, from 11 percent, as officials said inflation was slowing more than expected.

The annual inflation rate in Russia was 17.1 per cent in May, down from 17.8 per cent the previous month, separate data showed this week. Price growth was low in May and June, the bank said, thanks to the appreciation of the rouble and consumer demand for goods had weakened as households no longer feared rampant inflation.

But as Russia is increasingly isolated from the rest of the global economy by sanctions, companies and consumers will face a painful period of broken supply chains and absent technology, while the economy faces a sharp recession this year. Lowering the interest rate is one way the central bank can help prop up the economy. The central bank said on Friday that retail and corporate lending operations were weak.

“The external environment for the Russian economy remains challenging and significantly constrains economic activity,” the central bank said in a statement. “At the same time, inflation is slowing faster and the decline in economic activity is of a smaller magnitude than the Bank of Russia expected in April.”

Amid a large decline in imports, companies are struggling to fix production and logistics, the statement said, and there has only been “nascent diversification” in finding new suppliers and customers to sell too. Consumer spending was also down because households are choosing to save their money even as inflation eats into their incomes.

Two weeks ago, the bank hastily cut rates from 14 per cent to 11 per cent after the ruble climbed to a multi-year high against the US dollar, partly driven by capital controls imposed after the invasion. While the strengthening currency helped ease some inflationary pressures, it also put pressure on the budget.

New York Times News Service