Key rate cut to 14.25 percent amid rising proinflationary risks
The Bank of Russia has cut its key rate by 25 basis points to 14.25 percent per annum. Governor Elvira Nabiullina noted increased proinflationary risks despite a slowdown in current price growth.
Inflation slows, underlying remains elevated
Current price growth rates have significantly declined in recent months, primarily due to one-off factors such as faster-than-usual decreases in fruit and vegetable prices and ruble appreciation.
Measures of underlying inflation have also edged down, reflecting the accumulated effect of tight monetary policy and a narrowing demand-supply gap.
However, underlying inflation remains elevated, estimated at 4–5 percent in annualised terms.
Inflation expectations among businesses and households have decreased but stay high.
Fuel price spikes and a reversal in vegetable price dynamics are expected to influence June inflation.
A statistical effect from rescheduled housing and utility rate indexation will temporarily lower annual inflation in the coming months, representing an intra-year redistribution of price growth rather than a fundamental shift.
Economy improves, lending accelerates
Economic activity indicators improved in Q2 2026, recovering from temporary constraints in early 2026.
Overall, H1 2026 shows moderate growth in goods and services output, though heterogeneity across industries has increased due to structural transformation and accelerating government demand.
Consumer activity continues moderate growth, supported by wage increases, although the pace has decelerated.
Labor market tightness is easing slowly, but sustainable cost and price pressures require a further narrowing of the gap between wage growth and labor productivity.
Lending growth accelerated notably in April–May across retail (unsecured, car loans, mortgages) and corporate segments.
This accelerated lending, coupled with an elevated contribution of fiscal policy to money supply, suggests current monetary conditions may no longer be perceived as restrictive by borrowers, potentially requiring a tighter monetary policy stance.
Caution warranted in uncertain times
The balance of risks has shifted further towards proinflationary factors, with fiscal policy expansion already materializing and its scale remaining uncertain.
While current price growth has declined, the rise in future inflation acceleration risks, particularly those with lasting effects on demand, is significant.
The Bank of Russia's forward-looking decisions must account for time lags and the need for a balanced approach amid high uncertainty.
Neither the timing nor the size of future key rate cuts is predetermined, and pauses may be necessary to assess incoming information and the impact of earlier decisions.