Russian Central Bank Cuts Key Rate to 17% Amid Inflation Concerns
The Russian central bank reduced its key interest rate by 100 basis points to 17% on Friday. The move was smaller than analysts expected and highlighted ongoing concerns about inflation.
Inflation Still a Major Challenge
In its statement, the bank noted that inflation expectations remain high and could block a sustainable slowdown. It warned that pro-inflationary risks outweigh disinflationary factors in the medium term.
Economic Growth Slowing
Russia’s economy is under strain from Western sanctions and heavy military spending. Growth is forecast to drop from 4.3% in 2024 to just 1.2% this year. Some experts even warn of stagnation or a possible recession.
Analysts had predicted a 200 bps cut, but the rouble’s 5% decline this week limited the bank’s room to ease. Following the announcement, the rouble strengthened by 0.8% to 83.85 per dollar.
Market Reactions
According to Ilya Fedorov of BKS brokerage, the smaller cut reflected rouble weakness caused by rapid lending and money supply growth. Earlier this year, the rouble gained over 40%, helping fight inflation by making imports cheaper. The central bank still aims to reach its 4% inflation target in 2026.
Governor Elvira Nabiullina said monetary policy must prioritize low inflation and warned against a long-term currency depreciation.
Signs of Stagnation
August data showed 0.4% month-on-month deflation, with annual inflation slowing to 8.14% from 8.79% in July. Last year, the bank raised rates to 21%, the highest in two decades, to curb inflation. Lending costs soared to 25% or more, hitting industries such as construction, coal, and metals.
German Gref, CEO of Sberbank, recently said the economy was in “technical stagnation.” Official data showed growth of 1.1% year-on-year in Q2 but a 0.6% decline compared with the previous quarter. The central bank’s charts confirmed quarterly GDP contractions in the first half of the year.
Nabiullina Rejects Recession Claim
Despite this, Nabiullina insisted Russia is not in recession. She pointed to employment, consumer demand, and industrial production as signs of resilience. She described the slowdown as a “cooling” after an overheated period, noting that capacity must catch up with demand.
Fiscal Policy Risks Ahead
The central bank emphasized that fiscal discipline is vital to contain inflation. However, weaker energy revenues mean Russia could exceed its planned 1.7% budget deficit this year.
The bank warned that fiscal normalization has not yet taken place and hinted that upcoming budget decisions might force further monetary adjustments.
