The Bank of Russia continued its cycle of key interest-rate cuts but at a slower pace as Ukrainian attacks on refineries and a looming tax increase stoke inflation risks.
The central bank lowered borrowing costs by 50 basis points to 16.5% yesterday, its fourth straight reduction, though the smallest so far. Economists had been split ahead of the meeting, with roughly half expecting a cut, while the rest predicted a hold.
“Inflation expectations remain elevated,” policymakers said in a statement announcing the decision. “This may impede a sustainable slowdown in inflation.”
Speaking at a briefing after the decision, Governor Elvira Nabiullina warned the central bank would need “additional evidence” that it can pursue further cuts without “the risk that persistent inflation will get stuck above the target level” next year.
The bank increased its forecast for price growth in 2026 to 4-5% from 4% earlier. It also decreased the outlook for the current year’s gross domestic product to 0.5%-1% from 1%-2%.
After briefly aligning with the Bank of Russia’s 4% goal, inflation has picked up once again. Part of the reason is the end of seasonal factors like the summer drop in fruit and vegetable costs, while the effect of a stronger rouble is also fading.
More to blame, however, are fuel shortages. With the Kremlin showing little interest in negotiating an end to the war it started in 2022, Ukraine is stepping up strikes on energy infrastructure including refineries, oil pipelines and sea terminals. Gasoline prices jumped 3% in September and have risen another 2% this month.
“The current price growth acceleration was substantially affected by one-off factors,” the central bank said. “Price dynamics remain uneven across consumer basket components.”
Policymakers considered holding the key rate at 17% or cutting by 100 basis points in addition to the half-percentage point move they decided upon, Nabiullina said.
“The central bank chose a solution that satisfies the widest possible range of economic actors: a rate cut, but not so large as to eliminate the risks from maintaining a very high real rate,” said Dmitry Polevoy, investment director at Moscow-based Astra Asset Management. He said he expects the key rate to be lowered to 15%-15.5% before year-end.
Still, some thought the bank could have taken a bigger step. Russia’s Federal Statistics Service data “show that the current inflation trend is within the projected trajectory,” said Lev Denisov, director of the Macroeconomic Analysis and Forecasting Department at the Economy Ministry. “This creates room for further easing.”
The inflation outlook was already fragile. The central bank expects higher recycling fees for imported cars to squeeze the availability of such vehicles, and estimates that a plan to lift value-added tax to 22% from 20% in 2026 — to finance ballooning defence outlays — will add 0.6-0.8 percentage points to consumer-price gains.
Inflation expectations held at 12.6% in October.
To hit its inflation target by the end of next year, the central bank reckons seasonally adjusted monthly numbers must stay close to 4% for an extended period. It was a retreat to that level in June that kicked off the latest spell of rate cuts from a peak of 21%. That helped calm recession fears, even as rates remained too high to bring much relief to businesses.
New sanctions from Washington announced this week on Russia’s biggest oil producers further complicate the situation.
Apart from markedly reducing a major source of funding for the war — taxes generated by oil exports, “the latest measures may also have negative implications for the Russian economy and reignite the odds of a hard landing,” said Piotr Matys, a senior analyst at In Touch Capital Markets Ltd.
Nabiullina cast doubt on the idea that the new restrictions would require a change in monetary policy decisions. “No one can predict the exact impact of these sanctions, but we view them as a negative external factor,” she said. “Much will depend on how adaptation to these sanctions proceeds. From previous periods we know this takes some time, but adaption happens.”
The central bank warned that the “disinflationary impact” of the 2025 budget would be considerably smaller than expected, and said changes in fiscal policy could warrant an adjustment in policymakers’ approach.
“To achieve the inflation target on a sustainable basis, we will need a higher trajectory for the key rate than previously expected,” Nabiullina said in the briefing. The Bank of Russia now expects the benchmark rate in 2026 to be at an average of 13%-15% instead of 12%-13% as forecast earlier.
The central bank plans its next rate decision on December 19.