The Bank of Russia held its key interest rate at 21% on Friday, as expected, and signaled that further hikes remain a possibility if inflation does not decline fast enough.
The central bank cited high but easing inflationary pressures, emphasizing that current monetary conditions are necessary to bring inflation down to its 4% target by 2026.
“If disinflation dynamics do not ensure achieving the inflation target, the Bank of Russia will consider raising the key rate,” it added.
A Reuters poll of 29 analysts had unanimously predicted that the central bank would leave its rate unchanged, allowing time for its tight monetary stance to take full effect.
The current interest rate, which was raised to 21% in October, remains at its highest level since the early 2000s.
The central bank’s decision reflects its ongoing battle against inflation, one of Russia’s most pressing economic challenges.
The regulator has taken a cautious approach, balancing inflation control with concerns over economic growth.
Putin warns against excessive economic slowdown
Russian President Vladimir Putin, addressing business leaders this week, cautioned against an excessive cooling of the economy due to restrictive monetary policies.
While he acknowledged the need to control inflation, he urged policymakers not to treat the economy like a “cryotherapy chamber.”
Putin’s remarks come as many Russian business leaders express concerns that high interest rates are dampening investment and economic activity.
Businesses have argued that while inflation control is important, restrictive monetary policy should not come at the cost of long-term economic stability.
Despite these concerns, the central bank remains focused on its inflation target.
It forecasts that GDP growth will slow to 1-2% in 2025, down from an estimated 4.1% in 2024. However, the government holds a slightly more optimistic outlook, predicting 2.5% growth next year.
Inflation moderates as the rouble strengthens
Inflation indicators have shown some improvement in recent weeks.
Weekly inflation slowed to its lowest level this year, while annual inflation, though still above 10%, has eased slightly.
Household inflation expectations have also dropped to their lowest level since August 2024.
A strengthening rouble is also playing a role in moderating inflation.
The currency has appreciated by 28% this year, largely due to expectations of easing tensions between Russia and the United States and hopes for a peaceful resolution in Ukraine.
A stronger rouble helps lower inflation by making imported goods cheaper, reducing price pressures on consumers.
The central bank acknowledged the impact of the rouble’s appreciation, stating that “the current price growth in February and early March was partly constrained by a stronger rouble since the beginning of the year.”
The regulator also noted that easing geopolitical tensions could further contribute to a disinflationary trend.
While the central bank has kept the door open for further hikes, some analysts believe that rate cuts may be on the horizon.
Bloomberg Economics’ Russia economist Alex Isakov noted that inflation data is aligning with the central bank’s 7%-8% year-end projection.
Additionally, a sharp decline in the composite PMI reading and the continued strengthening of the rouble may prompt the central bank to start signaling a rate cut in the second quarter.
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