Reasons for the rate cut
The governor of the Central Bank, Elvira Nabiullina, explained that lowering the key rate from 9.5% to 8% followed a revised macroeconomic forecast. After a monetary policy board meeting, she noted that Russia’s economic downturn could extend, but might not be as severe as earlier projections suggested.
Speaking about the year ahead, the GDP decline was forecast to be smaller due to a softer drop in exports. The shift is largely tied to changes in oil exports finding new markets, supporting a steadier external environment for the economy.
Inflation expectations among households and businesses have eased to levels seen in spring 2021, according to the Central Bank’s website. Yet, the pace of business activity remains weaker than the Bank anticipated. External conditions continue to pose challenges that limit overall economic momentum.
The Central Bank will continue to adjust the key rate by weighing actual and expected inflation against the target, the ongoing restructuring of the economy, and risks from domestic and global conditions. Market responses will also influence future decisions.
An article on the regulator’s site notes that the Bank will assess the feasibility of another rate cut in the second half of the year. The Bank’s forecast shows inflation showing a path back toward target, with annual inflation projected to be around the mid-teens in the near term and stabilizing lower in the following years as policy takes hold.
Recent data indicated inflation slowed to around 15% in the middle of the year, after a peak in May. The decline in headline inflation was driven by a correction in goods and services prices following earlier spikes, aided by the ruble’s strength and subdued consumer demand.
The Bank also pointed to a drop in inflation expectations as a factor slowing price growth. In mid-year, expectations of households and businesses for prices weakened and aligned with earlier levels, reflecting the stronger ruble and a broad slowdown in inflation.
Key drivers identified for inflation dynamics include movements in the ruble exchange rate, the efficiency of import substitution, and the pace of imports of finished goods, raw materials, and components. The Bank believes that rate cuts in the spring through the summer will help widen the availability of credit while cushioning the economy from a deeper downturn.
Businesses and vacancies
Domestic enterprises continue to face production and logistics challenges, according to the Central Bank. Yet perceptions are shifting as suppliers and markets diversify for finished products, raw materials, and components. Consumer activity remains subdued but is showing signs of recovery, with imports of consumer goods gradually rising. At the same time, import declines attributed to sanctions still exceed the decrease in exports.
The labor market is viewed as stable, with unemployment near historical lows, though vacancies have fallen. The Bank projects GDP to contract in the near term, noting that the downturn will be driven mainly by supply-side factors. A tighter monetary policy is contemplated if needed to steer inflation toward the target in the medium term and to keep it around 4% in the longer run, should the budget outlook deteriorate.
The next policy meeting to review the key rate is scheduled for later in the year, with decisions guided by inflation momentum and financial-market responses.
Falling prices and low inflation
Industry experts observed a sharper-than-expected drop in the key rate and inflation expectations. Some analysts attributed the move to a stronger ruble and a cooling in inflation, arguing that cheap credit could support the country’s industrial sectors during restrictions and import shortages. Looking ahead, observers expect the central bank to exercise caution in upcoming meetings.
Deposits are likely to become less profitable as banks adjust to policy shifts. Analysts forecast that mortgage and loan rates will move lower in the coming weeks, given softened demand for credit and a cheaper loan environment abroad. Several banks signaled potential reductions in mortgage rates following the rate cut.
Industry representatives noted that mortgage rates for new buildings and finished residences varied, with expectations of further reductions by year-end as the policy stance remains accommodative. Bank forecasts indicate continued pressure on borrowing costs, potentially supporting a rebound in housing demand later in the year.