Russian CB cuts key rate to 20%, inflation slowing down

Gulf Today

a day ago

The Russian central bank cut its key interest rate by one percentage point to 20 per cent on Friday, saying economic growth is cooling down and inflation is 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,' the bank said in a statement.
A Reuters poll had predicted that the central bank would keep the key rate on hold. It had been at 21 per cent since last October to curb inflation in the overheated economy, which is focused on the needs of the military fighting in Ukraine.
As a result, 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 central bank governor Elvira Nabiullina.
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 per cent to 8 per cent and economic growth at 1 per cent to 2 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 largely thanks to US President Donald Trump's efforts to bring Russia and Ukraine to the negotiating table. But most analysts agree that without any sign of a breakthrough in the talks, the rouble is waiting for a trigger to start falling.
'Tight monetary policy has a particularly strong effect on the decrease in prices for non-food goods, including through the rouble appreciation,' the central bank said.
Inflationary expectations among households, an important gauge monitored by the central bank, rose for a second month in a row in May to a level last observed around the time of the last rate hike in October.
Some analysts have linked the rise in inflationary expectations to a planned mid-year nationwide increase in payments for electricity, gas, water, and communal services for households, suggesting that the regulator might ignore the gauge this time. Food inflation, with prices for staples like potatoes tripling since last year due to a poor harvest, has severely affected Russia's poor. The harvest outlook for this year will heavily influence the central bank's thinking. 'As for food products and services, inflationary pressures remain high,' the bank said.
The tight monetary policy, with the key rate at its highest level since the early 2000s and also the highest among major economies in the BRICS group, has made loans and debt financing, and therefore investment, inaccessible for many Russian firms.
The central bank counters this by saying that its research shows enterprises in most sectors make enough profits to finance their investments and that the situation even in vulnerable sectors, such as construction, does not pose systemic risks.
Meanwhile Russia's economic growth slowed to 1.4 per cent year-on-year in the first quarter of 2025, the lowest quarterly figure in two years, data from the official state statistics agency showed on Friday. Economists have warned for months of a slowdown in the Russian economy, with falling oil prices, high interest rates and a downturn in manufacturing all contributing to headwinds. Moscow reported strong economic growth in 2023 and 2024, largely due to massive state defence spending on the Ukraine conflict.
But economists have cautioned that growth driven by the defence industry is unsustainable and does not reflect a real increase in productivity.
The Russian economy grew by 1.4 per cent year-on-year in the first three months of the year, the lowest quarterly figure since the first quarter of 2023, Rosstat data showed.
The economy expanded 4.5 per cent in the previous quarter, according to the data.
Prices have also been rising quickly across the Russian economy for months, driven up by massive government spending on the Ukraine conflict and deep labour shortages.
Inflation in April remained above 10 per cent for the third month in a row, figures showed.
Last month, the Russian central bank maintained its key interest rate at 21 per cent, with inflation starting to decline but new risks facing the Russian economy because of global economic turbulence triggered by US trade tariffs.
'A further decrease in the growth rate of the global economy and oil prices in case of escalating trade tensions may have proinflationary effects through the rouble exchange rate dynamics,' the central bank said in a statement.
Agencies