Bank officials explained why they adjusted the interest rate
Central Bank of Russia Cuts Key Interest Rate by 200 Basis Points
On July 25, 2025, the Bank of Russia cut its key interest rate by 200 basis points to 18.00% per annum. The rationale was that inflationary pressures, including underlying ones, are declining faster than previously forecast, and domestic demand growth is slowing as the economy returns to a balanced growth path.
The decision to cut the rate by 2 percentage points was made by the Board of Directors, but they also sent a neutral signal to the market, indicating that a September rate cut is not predetermined. Despite the cut, the bank emphasized maintaining monetary conditions as tight as necessary to bring inflation back to its target in 2026.
The bank projects an average key rate between 18.8–19.6% in 2025 and 12.0–13.0% in 2026, indicating that policy will remain tight for a prolonged period. Further rate decisions will depend on the sustainability of the inflation slowdown and inflation expectations.
Inflation in Q2 2025 fell significantly, with seasonally adjusted price growth down to 4.8% annualized from 8.2% in Q1, and core inflation down to 4.5% from 8.8%. The inflation forecast for 2025 was lowered from 7-8% to 6-7%, with inflation expected to decline to 4% in 2026 in line with monetary policy.
Despite the rate cut, the central bank’s language remains cautious or "hawkish," signaling gradual normalization rather than a rapid rate reduction. Some analysts predicted a 3 percentage point cut in the key rate, but it was only reduced by 2 percentage points to 17% per annum.
The Central Bank expects Russia’s GDP growth to reach potential growth rates of 1.5-2.5% in 2027. However, Russia’s GDP growth will significantly lag behind the global average rates, which are projected at 3.1% in 2025, 2.9% in 2026, and 3.2% in 2027.
The decline in enterprise profits was expected due to the cooling of aggregate demand in the economy as a result of tight monetary and fiscal policies. The Bank of Russia's GDP forecast was not further reduced, despite the decline in enterprise profits.
Some analysts believe that the CBR will likely keep the rate at 18% in September, with easing possible only by the end of the year if inflation stabilizes and the ruble strengthens. The "doves" or those advocating for lower rates and easing monetary policy, noted the decline of current inflation towards the CB's target of 4% per annum, the return of the economy to a balanced growth trajectory, and the reduction in labor shortages, wage growth rates, and domestic demand.
However, opinions on the Central Bank’s further monetary policy are still divided. Investment strategist Yevgeny Kogan suggests that the Bank of Russia might choose between a 1 or 2 percentage point rate cut. The most optimistic comment came from Boris Kopaikin, who believes that the rate will likely be cut again in September, but by only 2-3%.
Eduard Rumyantsev, partner at the audit and consulting group "Uniсon", agrees that the disinflation trend is still fragile and could be disrupted by a weakening ruble, increased government spending, poor harvests, and a surge in consumer demand. The subsequent 1.4% correction in the stock market on the last Friday of July was attributed to the rate being cut by only 2 percentage points, as predicted by the consensus forecast.
The Current Account Surplus is expected to decline to $33 Billion in 2025, further declining to $28 Billion in 2026, and then rebounding to $32 Billion in 2027. Oleg Abelev, head of the analytical department of investment company "Rikom-Trust", commented that the current inflation could be reversed by developments on the foreign exchange market, if the ruble weakens to 90-92 per dollar, increased budget spending, crop problems, food inflation, and accelerating wage growth amid labor shortages in certain sectors.
In conclusion, the Central Bank reduced the key rate recognizing easing inflation and slowing demand, but signals careful monitoring and gradual monetary policy tightening over the medium term to secure inflation goals.
The rate cut by the Bank of Russia highlights a shift in focus towards finance and business, as the central bank aims to manage inflationary pressures and support domestic demand growth. However, the bank emphasizes the need for tight monetary conditions to bring inflation back to its target, indicating that further interest rate decisions will depend on the sustainability of the inflation slowdown and expectations in the business and finance sectors.
