Russia’s central bank eyes more aggressive easing as slowdown accelerates

The Bank of Russia will likely cut interest rates by 200 basis points on Friday as the economy continues to lose speed, with output and corporate earnings both trailing expectations.

According to Bloomberg, the decision would completely reverse last year’s rate hikes, which pushed borrowing costs to a peak of 21% before the central bank started easing in June.

Out of the nine economists surveyed, seven predict the key rate will fall again to 16%, one expects a 100bps cut, and one thinks the bank will hold at 18%. This would be the second straight 2-point cut, a rare back-to-back move that reflects just how quickly Russia’s economy is cooling.

Growth so far this year has already dropped to the lower end of the central bank’s own 1%–2% range, and some analysts think the full-year number might come in even lower. Industrial production was only up 0.7% in July, down sharply from 2% in June, and just half of what was forecast.

Business slowdown, weak demand pressure policymakers

Companies have been pushing for cheaper financing for months, with many struggling under high interest rates since the end of 2024. But the Bank of Russia didn’t react until June, when inflation (adjusted for seasonal trends) hit nearly 4%.

Now, those numbers are dropping. Inflation slowed to around 2% in July, once regulated utility tariffs were stripped out. “Inflationary pressure has significantly decreased,” the central bank said earlier this month. That change opened the door to bigger cuts.

Oleg Kouzmin, chief economist at Renaissance Capital, said the downturn in business activity has gotten worse since the last rate meeting.

“Signs of a noticeable slowdown in business activity, which have clearly intensified since the last meeting, are the main argument for a 200 basis-point cut,” Kouzmin said, adding that corporate results have broadly deteriorated.

Still, there’s no consensus inside Russia’s leadership about how bad things really are. Economy Minister Maxim Reshetnikov agrees with analysts warning that the slowdown is sharper than predicted. But the Bank of Russia still claims the economy is “overheated,” just less than it was earlier this year.

The country’s top lenders also don’t agree on the scale of the damage. Herman Gref, who runs Sberbank, Russia’s largest bank, described the current environment as “technical stagnation” and warned the central bank against letting it slip into a full recession.

On the other hand, Andrey Kostin, CEO of VTB, said he doesn’t see any “significant deterioration in the economy over the past quarter,” and that there are no serious risks visible right now.

Spending, deficit, and inflation expectations complicate the path forward

The upcoming rate decision is set for 1:30 p.m. Moscow time on Friday, followed by a briefing from Governor Elvira Nabiullina at 3 p.m. But even if inflation keeps slowing, the bank still has other problems to watch.

Gasoline prices are rising again thanks to a domestic fuel shortage, and the ruble is under pressure. At the same time, inflation expectations remain high, which makes the bank more cautious about cutting too aggressively.

Budget concerns also play a major role. The bank has repeatedly warned that if the government chooses to increase spending or raise deficit targets, it could make inflation worse. And that possibility is very real, given how far off the fiscal targets already are.

Oil revenue is falling, which is a problem. Moscow had planned to begin reducing its war-driven deficit in 2025, but that’s now unlikely. The Finance Ministry says spending reached 67% of the annual plan by the end of August.

The deficit has already hit 1.9% of GDP, or 4.2 trillion rubles, nearly $50 billion. That’s higher than the 1.7% full-year goal, and it’s adding pressure on rate-setters trying to balance growth and inflation.

With growth now falling behind its targets and political pressure increasing, all signs point to another deep cut on Friday. Whether that’s enough to calm businesses, fix weak demand, and hold the ruble remains to be seen.

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