The CBR cut the key rate by 200 bps as inflation subsides

RUSSIA ECONOMICS - In Brief 28 Jul 2025 by Evgeny Gavrilenkov

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On July 25, the CBR’s Board of Directors cut the key rate by 200 bps to 18% and announced it expects the policy rate to average 18.8-19.6% this year. Therefore, the regulator hinted at another 200 bps cut, most likely in September, as August will likely be deflationary. The CBR sees inflationary pressure easing and the economy returning to its balanced growth trajectory, i.e., in line with the potential output. In 2025, the regulator expects the economy to grow by 1.0-2.0% followed by a deceleration to 0.5-1.5% in 2026. The CBR expects inflation to fall to 6-7% this year and reach the 4.0% target in 2026 amid an elevated key rate (12-13%). In 2027-2028, the CBR expects the economy to grow by 1.5-2.5% amid 4.0% inflation and the key rate hovering at 7.5-8.5%.This scenario/forecast doesn’t look rosy or ambitious, but in the current uncertain environment, it doesn’t look unrealistic. Domestic consumer demand will unlikely be the main driver of economic growth as the nation’s population is shrinking, and one cannot expect the net migration flow to break this trend. Government consumption has also limited potential to expand at a high rate every year as fast as it was recently. However, net exports could rebound at some point, but investments will likely grow more moderately in the year to come.Meanwhile, Rosstat announced that the seven days ending on July 21 were deflationary (-0.05% w-o-w). Inflation MTD and YTD reached 0.76% and 4.56%, which was lower than over the same period in 2024 (1.14% and 5.06%). As said, August will likely be a deflationary month amid falling import prices (due to a strong ruble) and the harvesting season, to be followed by another key rate cut.