Russia: Bank of Russia cuts key rate in July
CBR makes another cut, surprising the markets: At its meeting on 24 July, the Bank of Russia (CBR) made its tenth consecutive cut, mirroring June’s decision and lowering the key rate by 25 basis points to 14.00%. Continued monetary easing surprised the markets, which had expected that the Bank would pause the cycle after Ukrainian drones hit multiple oil refineries across the country, causing widespread fuel shortages and a spike in inflation during the summer months.
Fragile economic growth prompts further easing: The Central Bank’s decision to continue monetary policy easing, despite a recent spike in inflation, was driven by timid economic growth seen so far in the first two months of Q2, after Q1’s decline, and signs of economic activity easing toward quarter-end. Moreover, a jump in inflation was driven by one-off factors, while underlying price pressures remained stable. Still, the cut was limited to 25 basis points due to the direct and second-round effects of supply shocks and a stronger-than-expected fiscal impulse over a three-year horizon.
Cuts will almost certainly continue as CBR downgrades its 2026 GDP growth forecast: The Bank of Russia revised its baseline scenario and now expects the key rate to average 14.50-14.60% this year vs 14.00-14.50 in the previous projection. Moreover, the CBR has upped its 2026 average inflation outlook to 6.0-7.0% from 4.5-5.5% previously and trimmed its 2026 GDP growth forecast to 0.0-1.0% from 0.5-1.5%. All this suggests the monetary easing will continue during the remainder of 2026 to support the barely growing economy, but at a slow pace. That said, the Bank noted that if a new budget coming in October assumes a higher structural primary budget deficit, monetary policy will be tighter than in the updated baseline scenario. All of our panelists expect further cuts by year-end, ranging from 50 to 300 basis points, with the Consensus for roughly 150 basis points of additional easing this year. The CBR will reconvene on 11 September.