As inflation slows and pressure mounts from businesses and government officials, the Bank of Russia is preparing for another cut to its key interest rate. According to a Bloomberg survey, all economists expect a rate reduction at Friday’s meeting — and some predict the most aggressive move yet this year.
Six out of ten analysts foresee a 200 basis-point cut, bringing the rate down to 18%. Some experts even allow for a deeper reduction, while others forecast a cut of 100–150 basis points. This growing conviction stems from a clear risk: Russia’s economy is losing momentum faster than expected and may be slipping into recession.
According to Olga Belenkaya, an economist at Finam Investment Company, the Central Bank “has to respond to the significant deceleration in inflation”, warning that otherwise high real interest rates could “over-cool the economy and trigger more pronounced financial stress for businesses.”
Declining Prices, Growing Alarm
June marked a turning point: annual inflation dropped to nearly 4%, the Bank’s official target. Contrary to earlier forecasts, price growth peaked not in May but in March, and has since moderated. On top of that, for the first time since September 2024, Russia’s Federal Statistics Service recorded a weekly decline in consumer prices — an encouraging sign that may open the door to a more decisive easing of monetary policy.
In June, the Central Bank executed its first key rate cut since 2022, trimming the rate from a record 21% to 20%. That move was cautious, made amid concerns that disinflation might stall. But since then, macroeconomic indicators have continued to show signs of cooling — consumer demand is weakening, and inflation expectations are easing.
Bloomberg notes that the economic slowdown is no longer confined to household spending. “Growth is now limited to a narrow set of industries tied to government spending and import substitution, while the rest of the economy shows fragile and uneven dynamics,” according to the Central Bank’s July report.
A Domino Effect: Housing, Furniture, Wood, and Cars
Some sectors are already experiencing the cascading effects of high borrowing costs. Home sales are down, leading to a drop in furniture production, which in turn hits demand for wood — forcing companies to pause or cancel investments. According to Interfax, Russia’s largest carmaker, AvtoVAZ, is even considering introducing a shorter workweek in response to falling demand.
The overall business climate is deteriorating. In July, the business confidence index returned to levels last seen during the economic turmoil of 2022, when the U.S. and G7 allies first imposed sanctions following the start of Russia’s war on Ukraine.
One particularly significant shift is happening in the labor market — previously a major driver of inflation. Unemployment remains at a record-low 2.2%, but demand for labor is dropping, and wage growth is losing momentum. “More and more companies are dropping out of the wage race,” the Bank of Russia noted in its latest trends report.
Time for Bold Action
Deputy Governor Alexey Zabotkin and adviser Kirill Tremasov have already signaled that a bigger rate cut is being considered. Central Bank Governor Elvira Nabiullina recently said that more aggressive easing could be on the table “if data showed faster-than-expected cooling of inflation and growth.” According to Oleg Kouzmin, an analyst at Renaissance Capital, “All the data from recent weeks have shown that the situation is unfolding exactly this way.”
In this context, the Bank of Russia has little choice but to act. While high rates were once seen as necessary to stabilize inflation and support the ruble, they are now becoming a threat to broader economic health. The longer tight monetary policy persists, the deeper the recession risks may become.
This article was prepared based on materials published by Bloomberg. The author does not claim authorship of the original text but presents their interpretation of the content for informational purposes.
The original article can be found at the following link: Bloomberg.
All rights to the original text belong to The Bloomberg.
