On Friday, Russia’s central bank announced its first interest rate cut since September 2022, reducing the rate by 100 basis points to 20%. This marks a shift in the nation’s monetary policy as inflation pressures, which had previously been described by President Vladimir Putin as “alarming,” begin to ease.
Interest Rate Reduction Details
The rate had been held at 21% since October 2022, the highest since the introduction of the new benchmark in 2013. The decision to lower the rate came after seasonally adjusted inflation in April fell to 6.2%, down from 8.2% in the first quarter of 2025.
Economic Outlook
While domestic demand growth continues to outpace the supply of goods and services, the Bank of Russia stated that the economy is gradually returning to a balanced growth path. However, monetary policy is expected to remain tight for an extended period to reach the inflation target of 4%.
Impact of the War and the Ruble’s Strength
Russia’s invasion of Ukraine in February 2022 has heavily impacted the economy, pushing up prices, especially with a weakened ruble. Despite these challenges, the ruble has become the world’s best-performing currency this year, largely due to capital controls and policy tightening.
GDP Growth and Sector Performance
Russia’s GDP growth slowed to 1.4% in the first quarter of 2025, a significant drop from 4.5% in the final quarter of 2024. Growth has largely been driven by the defense sector and state spending, with economists noting that other sectors are struggling.
Market Reactions and Future Projections
The 100-basis-point rate cut was a surprise to markets, with analysts predicting the rate could fall to 17% by the end of the year. However, given the demand-supply imbalances caused by the ongoing war, rates are expected to stay in restrictive territory.
