Russia’s central bank (CB) kept interest rates at a record low on Friday amid increased geopolitical risks but said there was room for lower rates as the COVID-19 pandemic situation was deteriorating.

The Bank of Russia held its key rate at 4.25%, in line with a Reuters poll that forecast Russia would keep the cost of lending unchanged before the US presidential election.

The central bank governor said the recent weakening in the rouble, which fell to its lowest since early 2016 against the euro in September, was still filtering into consumer inflation, the bank’s main area of responsibility.

But the coronavirus pandemic and a potential slowdown in the global economy will have disinflationary effects, Governor Elvira Nabiullina said.

“We still see room for a key rate decrease,” Nabiullina told an online media conference.

The central bank started cutting rates early this year when the economy suffered from a plunge in the price of oil, Russia main export, and from the coronavirus pandemic and subsequent lockdowns that curtailed business activity.

In a statement, the central bank repeated its wording from a month ago and said it will “consider the necessity of further key rate reduction at its upcoming meetings.” Though it was uncertain if the central bank will hold rates again or cut them as soon as at the next meeting on December 18, some analysts saw room for more easing next year.

The key rate may dive below 4% in 2021, Locko Invest said.

“We have pencilled in 25bp rate cut at the meeting in February and we think the repo rate will be lowered to 3.50% by end-2021,” Capital Economics said.

The central bank said on Friday monetary policy will remain soft in 2021, having said before it saw no need for negative rates when the key rate is below inflation, which it targets at 4%.

Lower rates support the economy through cheaper lending but can also increase inflation, the central bank’s main remit, and make the rouble more vulnerable to external shocks.

The central bank said it had improved its 2020 economic contraction forecast to 4% to 5% from 4.5% to 5.5% but lowered its expectations for 2021 growth to 3% to 4% from 3.5% to 4.5%.

The rouble showed limited reaction to the rate decision and traded at 76.36 against the US dollar.

Meanwhile, Russia’s economy could benefit by up to $30 billion this year from Russians spending their roubles at home rather than on foreign holidays due to travel restrictions linked to the COVID-19 pandemic, economists say.

The estimates are a rare piece of good news for an economy battered by low global oil prices as well as coronavirus lockdowns. Russia ran a budget deficit of around $23 billion in the first nine months of this year.

Like many other countries, Russia also saw foreign tourists stay away in droves in 2020. But it sent far fewer travellers overseas than usual after closing its borders in March. The outflow in some cases fell by as much as 80%.

Assuming that current travel restrictions remain in place, Russia will have saved an estimated $30 billion in 2020 from the shutdown of overseas tourism, said Sofya Donets, chief economist at Renaissance Capital.

“The delicate question is what did consumers spend this unspent travel money on,” she added. “But in any case, fewer imports mean a stronger rouble.”

Dmitry Dolgin, chief economist for Russia at ING, put the savings at $37 billion, but also said a drop in foreign visitors had cost Russia $17 billion in lost income, leading to a maximum net positive impact from the border closures of $20 billion.

Many Russians might have chosen to save rather than travel domestically, Dolgin added.

Marina Lisitsina, chief accountant at a small construction company, said she had set aside 100,000 roubles (around $1,300) for an all-inclusive trip to Turkey with her child in the summer, but ended up spending the money on home improvements and her summer holiday sunbathing at her dacha country home.

“This is our first summer without the sea, but health is more valuable. Common sense must overcome these desires,” she said. Just 440,000 Russians visited Turkey in August, a top holiday destination before the pandemic, or almost 60% fewer than a year earlier, according to Turkey’s culture and tourism ministry. For July and August, the drop was almost 80%.

Currency outflows attributed to travel fell 89%, part of a 52% third-quarter drop in services imports year-on-year, the central bank said last week. Any recovery will be slow due to continued curbs on foreign travel, it added.

Reuters