Russia's Central Bank Halts Rate-Cutting Cycle Amid Fresh Inflation Risks

The Bank of Russia kept its key interest rate at 14% per annum on September 11, refraining from a reduction for the first time since June 2025. The regulator interrupted a series of ten consecutive monetary policy easing decisions amid renewed inflationary pressure.

This was stated in the decision of the Bank of Russia's Board of Directors.

The previous time, on July 24, the Russian central bank lowered the rate by 0.25 percentage points to 14%. Prior to that, the rate had been reduced at every meeting since June 2025.

This time, the regulator emphasized that current inflationary pressure in Russia has significantly intensified in recent months. According to the Central Bank's estimate, the sustainable pace of price growth accelerated to 5-6% on an annualized basis.

A particularly sharp acceleration occurred in July: seasonally adjusted prices were rising at an annualized rate of 11.6%, compared to an average of 5.3% in the second quarter. Core inflation accelerated to 7%, up from 4.6% in the previous quarter.

The Bank of Russia estimates annual inflation as of September 7 at 6.3%.

Among the factors pushing prices up, the regulator singled out motor fuel and fruit and vegetable products. According to the Central Bank's assessment, the rise in fuel prices has begun to affect not only volatile inflation components but also its persistent part.

At the same time, the Russian central bank does not explain the pause in rate cuts solely by economic weakness. In its view, the Russian economy continues to grow at "moderate rates" in the third quarter. Growth in consumer demand is slowing, but it remains elevated, and investment activity is recovering compared to the beginning of the year.

Tightness in the labor market is gradually easing: Russian companies report a reduction in personnel shortages, and wage growth is decelerating. At the same time, unemployment remains near historical lows.

An additional factor for the Central Bank was credit activity. In recent months, it remained elevated primarily in the corporate sector, while retail lending grew at moderate rates.

The regulator stated that proinflationary risks have increased and, over the medium-term horizon, risks of excessively strong price deceleration prevail. Among these, the Central Bank cites a possible persistence of supply-demand imbalances, persistent production capacity problems in certain sectors, high inflation expectations, and wage growth outpacing labor productivity.

The Bank of Russia separately warned about risks from public finances. If new parameters of the Russian budget imply a larger structural deficit than in the baseline scenario, the regulator admits the need for a tighter monetary policy.

The pause generally met the expectations of the Russian financial market. According to a consensus forecast cited by Russian media, 24 of 30 analysts surveyed from major banks and investment companies expected the rate to be kept at 14% before the meeting.

German Gref, head of Sberbank, also allowed for "tactical pauses" in the rate-cutting cycle beforehand. At the same time, Sberbank expected that by the end of 2026 the rate could nevertheless decline to 13-13.5%.

The Bank of Russia currently forecasts inflation at 6-7% by the end of 2026. The regulator expects to return to the 4% target in 2027.

The next meeting of the Central Bank's Board of Directors on the key rate is scheduled for October 23.