By Paul Hannon and Ed Frankl
Russia’s central bank lowered its key interest rate for a third straight meeting as the economy and inflation slowed following two years of rapid expansion driven by government spending on the war in Ukraine.
The Bank of Russia cut its key rate to 17% from 18% on Friday, having lowered borrowing costs in early June for the first time since 2022 and followed that up with a July cut. However, investors had expected a larger trim to 16%.
“The economy continues to return to a balanced growth path. Lending growth has accelerated in recent months. Inflation expectations remain high,” the central bank said. “Underlying measures of current price growth have not changed significantly.”
The bank’s comments suggest policymakers remain concerned about elevated inflation expectations and have become a bit more worried about the lack of disinflation coming from fiscal tightening this year, justifying the slower pace of easing after the cut from 20% to 18% in July, Nicholas Farr, emerging Europe economist at Capital Economics, said.
“Even so, we think weakness in the economy and disinflation will mean that the policy rate is still lowered quite aggressively,” he said in a note to clients.
The central bank is loosening the restraints it placed on activity amid signs that Russia’s economy has stalled as President Vladimir Putin continues to devote men and material to the war in Ukraine.
The economy contracted in the three months through March, the first decline in output following the full-scale invasion of Ukraine in February 2022. Early estimates suggest it returned to modest growth in the second quarter.
However, Russia’s manufacturing sector has continued to falter, with an August survey of purchasing managers pointing to a third straight month of declining activity.
“Panelists often stated that financial difficulties at customers hampered new sales and weighed on demand conditions,” said S&P Global, which conducted the survey.
In July forecasts, the Bank of Russia said it expects the economy to grow by between 1% and 2% this year, having expanded by 4.3% in 2024. It expects to see even slower growth in 2026.
The slowdown has in large part been driven by the central bank, which lifted its key rate to a peak of 21% by late 2024 from 7.5% in mid-2023 as high levels of military spending sent prices surging. In essence, the central bank cooled demand in the rest of the economy to offset the increase in demand related to the war.
But Russia also faces declining prices for oil, one of its main exports even though it continues to find buyers in China, India and elsewhere despite U.S. and European efforts to limit its sales. The U.K. on Friday announced new sanctions against Russia, targeting oil fleets and suppliers of military components.
The central bank reiterated previous comments that the slowing global economy and oil prices should trade disputes escalate could weaken the ruble and keep inflation above target for longer.
The Bank of Russia said it would keep its key interest rate “tight as necessary” to reach its 4% inflation target in 2026, although removed previous wording about restraint remaining for “a long period.” Prices rose by 8.2% in the year through Sept. 8, the central bank said, down from 8.8% in July.
Write to Paul Hannon at paul.hannon@wsj.com and Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
09-12-25 0818ET