Russian Central Banks Key Rate Reduced to 16% Amid Ongoing Inflation Concerns

The Central Bank of Russia implemented a modest reduction of half a percentage point to its key interest rate on Friday, lowering it to 16%. This marks the fifth successive reduction this year.

Policymakers have approached the easing of the key rate with caution after raising it to a two-decade peak of 21% in September 2024 in an effort to control escalating inflation, which has been significantly influenced by substantial military expenditures.

In its statement released on Friday, the Central Bank reaffirmed its prior stance, indicating that it would sustain a tight monetary policy for an extended duration as it seeks to reduce inflation, despite the economy slowing down due to high borrowing costs.

As of mid-December, annual inflation was recorded at 5.8% and is projected to remain below 6% until the year’s end, which is still two percentage points above the Central Bank’s target. Officials have indicated their expectation for inflation to align with the target by the latter half of 2026.

The latest rate cut, much like the previous reductions, was widely anticipated, given that an increasing number of voices within Russia’s business sector have warned of a «perfect storm» caused by a combination of elevated interest rates and an overvalued ruble, potentially hindering investment and slowing economic growth in the future.

According to earlier forecasts from the Central Bank, Russia’s gross domestic product is projected to expand by only 0.5-1% this year, contrasting with the 4.3% GDP growth reported for 2024 by the state statistics agency Rosstat.

On Friday, the Central Bank noted a slight rise in inflation expectations, which «could impede a sustained decrease» in consumer prices. It also highlighted robust credit activity observed in recent months.

«The divergence of the Russian economy from its balanced growth trajectory is diminishing. Overall economic activity remains on a moderate uptick, although growth rates differ across various sectors,» the policymakers stated, emphasizing their commitment to curbing inflation above all else.

Additionally, the Central Bank mentioned that the upcoming 2% increase in Russia’s value-added tax (VAT), effective next year, is expected to trigger a temporary rise in inflation, after which prices are anticipated to resume their downward trend.

Sofia Donets, chief economist at T-Investments, characterized the Central Bank’s press release on Friday as «fairly hawkish.» She noted that market participants, who had been hoping for more aggressive actions from the regulator, might perceive the modest half-point rate cut as disappointing.

«In recent days, following the release of weak inflation data, the market had begun pricing in more optimistic expectations. Consequently, we are observing some cooling,» Donets remarked.

«Merely seeing inflation decline is insufficient; the [Central Bank] aims to ensure that this decline is sustainable. They may be attempting to establish the notion that a 50-basis-point cut is the new standard, emphasizing that, as the saying goes, significantly more efforts are necessary to achieve larger reductions,» she added.

Russian stocks experienced a slight uptick as the Central Bank tempered expectations for more substantial rate cuts in the near future. The MOEX stock index increased by roughly 0.21%, while the ruble was trading at 80.44 against the U.S. dollar, reflecting a rise of 0.81%.

The next meeting regarding the key rate at the Central Bank is scheduled for February 13.