As we predicted, the Central Bank is not eager to slash interest rates. On Friday, it reduced its base rate by just 50 basis points to 16.5%. This sent a clear signal that its monetary policy will continue to be very cautious, while leaving it some room for maneuver at the final rate-setting meeting of the year in December.
- In its statement, the Bank said that the economy is still returning towards a balanced growth trajectory, but lending growth accelerated in recent months and inflation expectations remain high. The bank pledged to maintain a tight policy “which is essential to return inflation to target levels.”
- In its updated forecast, the Central Bank said that the average base rate in 2026 would be 13-15%, compared with 12-13% in its previous forecast. This means strict monetary policy will have to remain in place for longer.
- The regulator stated that it sees inflationary risks in the ongoing overheating of the labor market, the impact of VAT rises and also from deteriorating foreign trade conditions. It also blamed, albeit softly, its higher inflation forecast on Moscow’s current budget plans, which it feels were less anti-inflationary than previously expected. The key factors in any future fall in inflation will be an economic slowdown and reduced demand.
- On growth, it still sees signs that the economy is continuing to slow. Though it showed positive growth in Q3, the revised 2025 forecast sees the possibility of a 0.5% fall in the final three months of the year, or, at best, an increase of no more than 0.5% on an annualized basis. The inflation forecast for the year end is between 6.5-7%, while the prediction for 2026 was also nudged higher, to 4-5%. Russia officially targets an inflation rate of 4%.
Why the world should care
Budget spending, domestic economic problems, Western sanctions and weak oil prices are all creating an economic slowdown amid relatively high inflation. Interest rates will remain higher for longer than expected. Stagflation is becoming reality.
