The Bank of Russia has announced a decision to reduce the key interest rate to 20% per annum. This decision follows a Board of Directors meeting on June 6, 2025. Governor Elvira Nabiullina stated that the high key rate had significantly slowed inflation, although price growth remains uneven across different goods and services.
Nabiullina explained, “We are more confident that disinflationary processes have become sustainable.” Despite the rate cut, tight monetary conditions will persist to ensure inflation returns to target levels.
Inflation has shown signs of slowing down, with annualized price growth rates decreasing from 7% in March to about 6% in April. The non-food goods sector experienced low price growth due to the impact of high interest rates and a stronger ruble. Meanwhile, food prices showed varied trends, with some items like milk and eggs seeing stable or reduced prices.
Service prices continue to grow due to persistent income increases driving demand faster than for goods. Inflation expectations remain elevated but show a downward trend among businesses since early this year. However, household expectations fluctuate between 13-14%, influenced by everyday price observations.
Economic activity shows signs of moderation. High-frequency data indicate slower household consumption and investment growth in April and May. Labour market conditions are easing slightly as companies report fewer labour shortages and reduced work shifts.
Monetary conditions remain tight despite slight decreases in nominal interest rates on loans and deposits since April’s meeting. Real interest rates stay high due to slowed inflation and decreased expectations.
Credit activity is modest overall, with unsecured consumer lending cooling down while mortgage lending sees minor increases. Corporate lending expanded slightly over recent months but remains at lower forecast bounds for total economic lending.
External trade conditions show a decrease in foreign trade surplus during March-April due to falling prices for core Russian exports like crude oil and metals. Imports remain moderate under tight monetary policy.
Proinflationary risks still prevail despite some reductions since the last meeting. High household inflation expectations persist alongside labour market concerns affecting inflation targets’ return. Global export price dynamics also pose risks.
Disinflationary risks include potentially faster cooldowns in lending and demand than currently observed. Fiscal policy impacts could necessitate adjustments if less disinflationary than planned.
Geopolitical developments present unpredictable risks impacting decision-making processes regarding future key rate changes aimed at achieving an inflation target close to 4% by 2026.
Governor Nabiullina concluded by noting that previous decisions would continue supporting disinflation efforts while cautioning against premature cuts or pauses without sustained declines in inflation or its expectations: “Our approach requires a lot of caution…if inflation stops decreasing sustainably or even starts accelerating; the key rate may be raised.”
