Russian Central Bank Makes Bold Move with 2% Interest Rate Cut Amid Easing Inflation Concerns

On Friday, Russia’s Central Bank made a significant adjustment by reducing its key interest rate by 2 percentage points. This decision marks a departure from the prolonged period of elevated rates that, while effective in controlling inflation, had also made borrowing prohibitively expensive for both consumers and businesses.

Following this action, the key rate was decreased to 18%, down from 20% in June. The rate had been maintained at 21%—the highest level in two decades—since October 2024 to combat escalating prices, which were exacerbated by wartime spending and a declining ruble.

In a statement released on Friday, the Central Bank noted a significant reduction in inflationary pressures over recent months. Adjusted for seasonal variations, annualized inflation fell to 4.8% in the second quarter, down from 8.2% in the first quarter. Core inflation also decreased, dropping to 4.5% from 8.8% in the prior quarter.

Policymakers indicated that the effects of restrictive monetary policy on demand are becoming increasingly clear, as evidenced by diminishing inflationary pressures. They remarked, “The repercussions of stringent monetary measures, notably through the appreciation of the ruble, are becoming more visible in the slow growth of non-food product prices.”

Nonetheless, the Central Bank warned that inflation expectations remain high, suggesting that any subsequent easing of policy will be conducted with caution and gradually. They forecast that inflation will decline to between 6% and 7% by the end of 2025 and will return to their 4% target by 2026.

The policymakers anticipate that the average key rate will fall between 18.8% and 19.6% this year, before decreasing to 12% to 13% in 2026. Although this projection is still considerable, it represents a notable adjustment from prior estimates.

The Russian economy showed a modest growth of only 1.4% year-over-year in the first quarter of 2025, the slowest rate of growth in two years. The World Bank has previously stated that it expects growth to remain stagnant at 1.4% for the entire year, following two years of expansion driven by state spending related to the war—a growth model that economists caution is unsustainable and obscures more serious issues related to productivity.

This decision was largely expected, as an increasing number of voices within Russia’s business community have cautioned that the combination of high interest rates and an overvalued ruble could create a “perfect storm” hampering investment and constraining economic growth in the future.

Sofia Donets, chief economist at T-Bank, characterized the language from the Central Bank on Friday as “hawkish” despite the 2% rate reduction. She noted, «The Central Bank has maintained a cautious approach in its last four meetings, but this hasn’t impeded its easing cycle from starting and now continuing.» Donets also pointed out that policymakers seem focused on gradually lowering long-term interest rates.

She predicts that the Central Bank will reduce the key rate to 15% by year-end, which is slightly more optimistic than the outlook of other analysts who expect a reduction to 16% to 17%.

Following the announcement of the rate cut, the Moscow Exchange index fell by 0.22%, and the ruble was trading at 79.35 against the U.S. dollar.

The next scheduled meeting of the Central Bank’s policy committee is on September 12.