Russia should consider cutting interest rates even further in the coming months as inflation is on track to undershoot its target in 2021 amid lower-than-expected economic growth, the International Monetary Fund said on Tuesday.
Russia has slashed rates to record lows this year as the economy was hit by the Covid-19 pandemic and lockdowns to contain it and by lower prices for oil, its main export.
"We project below-target inflation for some time and hence recommend policy easing in the coming months," the IMF said in a report after regular consultations with Russian authorities.
The central bank could even lower the rate below 4%, its inflation target, Jacques Miniane, IMF Mission Chief for Russia, told an online media briefing.
The central bank holds its next rate-setting meeting on Dec. 18. A Reuters poll of analysts conducted in late October predicted it will keep its benchmark interest rate at 4.25%.
The IMF said it expected annual inflation in Russia to stay in the range of 3-3.5% in the second half of 2021.
The IMF said it welcomed the extension of public support measures but said authorities should stand ready to do more, given that signs of economic recovery are now under threat from a sharp rise in new coronavirus infections.
In the past few weeks, Russia has been reporting record increases in Covid-19 cases almost on a daily basis but authorities have said they will not impose a nationwide lockdown as they did earlier in the pandemic.
The IMF said it sees Russia's economy shrinking by 3.9% in 2020 before growing by around 2.5% next year "assuming the Covid-19 situation gradually normalizes". In October, the IMF predicted the Russian economy would grow by 2.8% in 2021.
The IMF forecasts are close to those from the Russian central bank, which expects the economy to shrink 3-4% this year and grow by 2.5-3.5% in 2021.
"Activity in the coming months could prove weaker if stronger lockdowns need to be imposed, in turn bringing about new layoffs and further stretching firms' balance sheets," the IMF said.
"Furthermore, geopolitical tensions cloud the outlook."