The Bank of Russia has opted to maintain its key interest rate at 21% per annum, according to a statement from Governor Elvira Nabiullina following the Board of Directors meeting on February 14, 2025. The decision comes amidst notable inflation acceleration at the end of 2024, attributed to an overheating demand.
Governor Nabiullina explained that while price pressures remain significant, with underlying inflation indicators exceeding 10% by the end of last year, factors such as a cooldown in lending and increased household savings are expected to slow down inflation in the coming months. “We are now more certain that monetary conditions have already become restrictive enough for inflation to start decelerating,” she stated.
Despite high inflation expectations among economic agents, businesses have lowered their price expectations for the first time since early 2024. January and February data indicate a slight deceleration in current price growth compared to late 2024. However, it is too early to confirm a trend reversal.
Nabiullina noted that GDP growth accelerated in the fourth quarter of 2024 but deviated from a balanced growth path. Labour market conditions are showing signs of normalization as companies reduce recruitment targets and align wage growth with productivity increases.
Domestic demand expanded more than anticipated at the start of 2025, leading to an upward revision of GDP growth forecast for this year to between 1-2%. The medium-term economic outlook remains unchanged with expectations that monetary tightening effects will gradually decrease overheating.
Interest rates have edged down since December due to revised market expectations and regulatory adjustments. Lending has slowed across all segments, with both corporate and retail portfolios contracting over recent months. Budget expenditures also contributed to this slowdown as companies repaid loans using budgetary funds received through state contracts.
The lending growth forecast for this year has been revised downward to between 6-11%, driven by tight monetary conditions and planned regulatory normalizations necessary for disinflation.
Externally, the global economy continues moderate expansion without significant changes in key balance of payments items since October forecasts. From February onwards, forecasts will use Russian oil prices instead of Brent crude prices for tax purposes.
Risks remain skewed towards pro-inflationary pressures due to potential trade wars and global market fragmentation affecting Russian exports. There is also concern about inflation expectations and labour market dynamics impacting future decisions.
In conclusion, Governor Nabiullina emphasized that maintaining the pause on key rate increases is currently deemed most balanced under prevailing conditions. However, should existing trends not lead to sustained decreases in lending and inflation, further rate hikes may be considered necessary.
