Russia’s central bank has lowered its benchmark interest rate from 21% to 20%, marking its first rate cut since September 2022 as inflationary pressures show signs of easing and economic growth cools after years of war-driven stimulus.
The Bank of Russia’s decision, announced Friday, surprised many economists who had forecast a more cautious stance. Although annual inflation remains elevated at around 10%, the central bank highlighted a sustained deceleration in price growth, with April’s seasonally adjusted monthly inflation easing to 6.2%, down from a first-quarter average of 8.2%.
While the ruble fell 2.72% against the US dollar following the announcement, it remains the world’s best-performing currency in 2025 so far, according to Bank of America—a trend attributed to capital controls, tight monetary policy, and a weaker dollar.
Growth slows after war-fuelled boom
The rate cut comes as Russia’s economy shifts from a period of rapid, war-driven growth to a more restrained trajectory. Gross domestic product grew just 1.4% in the first quarter of 2025, down from 4.5% in the previous quarter. Economists say that recent gains have been heavily concentrated in manufacturing—especially in defence sectors—buoyed by surging state expenditure.
Military spending now accounts for nearly 9% of GDP, a level unseen since Soviet times, according to President Vladimir Putin. This wartime fiscal expansion helped offset the effects of Western sanctions and contributed to overheating, labour shortages, and surging prices throughout 2023 and 2024.
In Friday’s statement, the Bank of Russia said it sees the economy gradually returning to a “balanced growth path,” but warned that monetary policy would remain tight “for a long period” to ensure inflation falls back to its 4% target, which it does not expect to reach until 2026.
Political pressure and cautious optimism
Governor Elvira Nabiullina, under mounting pressure from economic ministries and industry groups to ease borrowing costs, described the move as part of a broader transition toward a soft landing. “We are close to a scenario of balanced economic growth,” she said at a post-decision press conference, adding that she saw “no overcooling” of the economy.
However, policymakers remain wary. “Demand-supply imbalances from the war suggest interest rates will need to stay in restrictive territory,” said Nicholas Farr of Capital Economics, who now forecasts rates could fall to 17% by year’s end.
Sofya Donets, chief economist at T-Investments in Moscow, called the rate cut a potential “turning point,” though she noted that the central bank is still acting cautiously. “Finally, the Central Bank has noticed a sufficiently stable decline in inflation,” she said.
Despite fading hopes of a ceasefire between Russia and Ukraine—once seen as more likely under renewed US engagement—fighting continues and uncertainty remains high. As such, Russia’s central bank appears committed to navigating between competing pressures: curbing inflation, supporting strategic sectors, and maintaining macroeconomic stability under prolonged geopolitical strain.
