Russian central bank delivers surprise rate cut, first since 2022

MOSCOW: The Russian central bank cut its key interest rate by a full percentage point to 20 per cent on Friday, a surprise move by the bank which it justified by pointing to declining inflation pressure and a more robust rouble.

It was the first easing since September 2022 by the bank, which has faced pressure from business leaders and top government officials to begin cutting rates.In a statement, the bank said economic growth was cooling down and inflation was slowing.

“Current inflationary pressures, including underlying ones, continue to decline. While domestic demand growth is still outstripping the capabilities to expand the supply of goods and services, the Russian economy is gradually returning to a balanced growth path,” it said.

At a press conference following the decision Governor Elvira Nabiullina dismissed a suggestion that the regulator had given in to political pressure to reduce rates.A Reuters poll had predicted that the central bank would keep the key rate on hold. It had been at 21 per cent since October to curb inflation in the overheated economy, which is focused on the needs of the military fighting in Ukraine.

“The Bank of Russia gave us an adrenaline boost today. The rate has been reduced to 20 per cent after all,” said Sofya Donets, chief economist at T-Bank. “We are passing a turning point in a long, extended cycle of policy tightening.”

Nabiullina did not rule out future rate hikes if inflation begins to rise again. She said the board considered options for a half and a full percentage point cut at the meeting.Russia’s economic growth rate fell to 1.5 per cent year-on-year in the first four months of 2025, compared to 4.3 per cent last year, prompting sharp criticism of Nabiullina.

ROUBLE APPRECIATION EFFECT

Consumer prices have risen by 3.39 per cent since the start of the year, compared to 3.88 per cent in the same period last year, while the annualised inflation rate fell below 10 per cent in May after peaking at 10.34 per cent in March.

The central bank forecasts inflation this year at 7.0 per cent to 8.0 per cent and economic growth at 1.0 per cent to 2.0 per cent. The Economy Ministry is more optimistic, predicting growth of 2.5 per cent.

The strengthening of the rouble, which has rallied by about 40 per cent against the dollar since the start of the year, has aided the central bank in its fight against inflation by making imported goods cheaper.

Its rise has been attributed by many analysts and traders to US President Donald Trump’s efforts to bring Russia and Ukraine to the negotiating table. Most analysts agree that without any sign of a breakthrough in the talks, the rouble is waiting for a trigger to start falling.

Nabiullina said high interest rates that helped to suck trillions of roubles of people’s savings into bank deposits were a key factor behind the rouble’s strength.“We now have more confidence in the stability of the exchange rate dynamics than we did in April,” she said.

The rouble was down by 2.6 per cent against the US dollar on Friday. The central bank warned that a global economic slowdown and falling oil prices as a result of trade wars may drive up inflation again through a weaker rouble.

FOOD INFLATION REMAINS HIGH

Despite the cut, the inflation backdrop remains in focus.Expectations among households, an important gauge monitored by the central bank, rose for a second month in a row in May which some analysts linked to a planned mid-year nationwide increase in payments for electricity, gas, water, and communal services.

Food inflation, with prices for staples like potatoes tripling since last year due to a poor harvest, has severely affected Russia’s poor. The central bank said in its statement that food inflation remained high.

“This year, the outlook for the harvest is better. It's important to understand that the harvest doesn't need to be record-breaking; it just needs to be no worse than last year to ensure a more restrained dynamic in food prices,” Deputy Governor Alexei Zabotkin said.