Russia Cuts Interest Rate Amid Rising Inflation Concerns

Russia’s central bank surprised markets by cutting its key interest rate by 50 basis points to 16.5% on Friday, in its first meeting since the government announced plans to raise VAT in 2026. The move came amid mounting international sanctions and a slowdown in economic growth.

The rate decision aligns with economists’ expectations, but the central bank simultaneously raised its 2026 inflation forecast to 4–5%, up from 4%, citing the upcoming tax hike as a contributing factor. Its average interest rate estimate for 2026 was also revised upward to 13–15%.

Governor Elvira Nabiullina highlighted a cautious approach to monetary policy, pointing to easing labor market pressures and slower demand growth as reasons for the rate cut. She noted that while the economy shows signs of cooling, inflationary pressures remain influenced by temporary factors, including rising fuel and seasonal food prices.

Rouble Strengthens Despite Concerns

Following the announcement, the Russian rouble rose by 0.7% against the U.S. dollar. Businesses had urged faster rate cuts, arguing that lower rates around 12–14% would support investment and economic recovery. Yet the central bank’s small reduction reflects its concern over persistent inflation, which has seen cumulative growth of nearly 5% since the start of 2025.

Inflation Drivers and Global Pressures

Fuel prices, particularly gasoline, have surged over 11% this year due to attacks on Russian refineries, intensifying inflation concerns. Household expectations indicate inflation could reach 12.6% over the next year. The central bank cited these as “one-off” factors affecting short-term price growth.

External pressures, including recent U.S. sanctions targeting major oil producers Lukoil and Rosneft, add uncertainty to the outlook. Economic growth is projected to slow sharply to around 1% in 2025 from 4.3% last year, with high interest rates dampening investment and the government increasing taxes to manage the budget.

Despite these challenges, the central bank maintains a gradual approach, signaling that monetary easing will continue but cautiously, balancing support for growth with the need to contain inflation.