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Russia’s central bank cut its key interest by a full percentage point on Friday to 20 per cent, its first cut since 2022, as Vladimir Putin’s war economy cools.
“Domestic demand continues to outstrip the economy’s capacity to expand the supply of goods and services, but Russia is gradually returning to a more balanced growth path,” the CBR said in its statement explaining the decision.
The move, which was expected by a majority of economists polled by Bloomberg, comes after a fall in inflation and underscores the end of a two-year GDP surge, fuelled by wartime spending.
The drop in annual inflation to 9.8 cent in June after a months-long stretch of double-digit growth was probably central to the rate cut, several economists told the Financial Times.
“The CBR made it clear that its main focus is the steady decline in inflation,” said Olga Belenkaya, head of macroeconomic analysis at Moscow-based FG Finam shortly before the rate announcement on Friday.
But the bank stressed Friday’s cut would not mark the start of a rapid reduction in rates, adding that it would “maintain monetary conditions as tight as necessary” to return inflation to its 4 per cent target in 2026.
The CBR noted that while inflationary risks have eased slightly, they still outweigh forces that would lead to cooling consumer prices over the medium term.
The bank has found itself in a “very difficult spot,” said Janis Kluge, an expert on Russia’s economy with the German Institute for International and Security Affairs. Though inflation is easing, its staying power is uncertain, with non-food prices falling but food costs still rising and hitting the poorest hardest, he added.
Since the summer of 2023, the Russian economy has been running hot, fuelled by soaring government military-linked spending. CBR governor Elvira Nabiullina had previously likened the situation to a car “racing at full speed”, warning that it “can go fast, but not for long.”
To rein in the pace and curb inflation, which has climbed cumulatively by about 35 per cent since the full-scale war against Ukraine began, the CBR had kept interest rates at a record 21 per cent since October last year.
But high borrowing costs have weighed on demand from both businesses and consumers. “Retail lending has basically stopped, and corporate lending growth has become minuscule — but that was the pill to take,” said Oleg Kouzmin, chief economist at Moscow-based Renaissance Capital.
Now, the challenge is a cooling economy. “It is inevitable, but we must act carefully to avoid excessive cooling, like in a cryochamber,” President Vladimir Putin warned in March.
In the first quarter of 2025, Russia’s GDP grew by only 1.4 per cent, according to Russia’s main statistics agency Rosstat, a significant drop from 4 per cent in the previous two years. Quarter to quarter seasonally adjusted growth was even negative, for the first time since 2022.
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