Russia’s central bank lowered its benchmark interest rate by 1 percentage point to 17% on Friday, marking the third cut since June as policymakers grapple with slowing growth and renewed inflationary pressures.
The move underscored the challenges facing Russia’s wartime economy as the conflict with Ukraine drags into its fourth year, stretching public finances and testing the country’s resilience.
The reduction was smaller than many economists had anticipated.
A Bloomberg poll of analysts had predicted a 2-point cut, but the central bank signalled caution, citing lingering risks to price stability.
“The Bank of Russia will maintain monetary conditions as tight as needed to bring inflation back to its [4 per cent] target in 2026,” the bank said in a statement.
Growth momentum fades after military spending boom
Russia’s economy expanded strongly in 2023 and much of 2024, with GDP growth exceeding 4% annually, buoyed by record military expenditure, high energy receipts and surging consumer demand.
Rising wages and subsidies fuelled a consumer boom, even as sanctions limited access to imports.
That momentum has faded in recent quarters.
Official estimates showed GDP contracting in the first quarter of 2024, the first decline since the invasion of Ukraine in February 2022.
While growth returned in the second quarter, the pace slowed sharply to 1.1% year on year.
Industrial performance has also deteriorated.
An August survey of purchasing managers pointed to a third consecutive month of contraction in the manufacturing sector, with S&P Global noting weak demand and financial constraints among customers.
“High interest rates are feeding into a domestic slowdown, and we expect falling energy prices to weigh on Russia’s export revenues,” said Nicholas Farr, an economist at Capital Economics, ahead of the rate decision.
Inflation concerns resurface amid weaker rouble
Inflation, a key concern since the start of the war, remains stubborn.
Consumer price growth spiked to 18% in April 2022 after sanctions, rising import costs and labour shortages drove companies to raise wages.
Tighter monetary policy helped bring inflation below 9% by July this year.
But recent weakness in the rouble, combined with falling export revenues and expectations of further monetary easing, has reignited pressure.
The central bank noted that the rouble has gained roughly 20% against the US dollar since January, yet broader inflation risks persist.
Additional pressures have emerged from higher fuel prices, driven by Ukrainian drone strikes on Russian refineries. These costs are filtering into consumer prices and the wider economy.
Fiscal strain deepens as military outlays mount
At the same time, Russia’s fiscal position is deteriorating.
Budget revenues have fallen while the deficit has widened, leaving policymakers with difficult choices.
The government is expected to present its 2026 budget later this month, and officials have indicated that spending cuts are unlikely.
Instead, policymakers are considering indirect tax increases.
According to independent outlet The Bell, a proposal to raise value-added tax by 2 percentage points to 22% is under discussion, a measure that would add to inflationary pressures.
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