After two years of fiscally-fueled growth and double-digit inflation, the Russian central bank is claiming a victory over galloping prices. But it’s come at a price.
The Bank of Russia cut its base rate by a substantial 200 basis points to 18% on July 25, following a 100-point reduction the previous month. It also lowered its inflation outlook for 2025 and signaled a possible further cut to bring rates to 15% by the end of the year.
Inflation has been the primary challenge for Elvira Nabiullina, the outspoken and conservative Bank of Russia governor. Despite months of pressure from politicians and industrialists, she maintained interest rates at a prohibitive 21% after the Russian government responded to Western sanctions, war needs, and labor shortages with unprecedented fiscal spending — a striking departure from its traditionally conservative budgetary policy.
This state spending, supported in part by oil revenues and higher taxes, kept the economy afloat and delivered 4.3% GDP growth in both 2023 and 2024. The downside was double-digit inflation driven by labor shortages, rising salaries, and the domestic industry’s inability to expand production.
After a protracted uphill battle, the central bank now appears to be winning its struggle against rising prices and an overheated economy. Earlier in July, it recorded inflation close to its 4% target — the first time in months the figure had been so low.
In the week leading up to the rate cut, inflation even turned negative. Average annual inflation in the second quarter fell to 4.8%, compared with 8.2% in the first quarter. This represented a significant improvement on the bank’s April prediction of 7% to 8% inflation for this year, and it updated its forecast to between 6% and 7%.
The decline was attributed to a strong ruble, which makes imports cheaper, though the labor market remains overheated. Unemployment is at a historic low of 2.2%, with demand for workers unchanged since late last year.
This labor shortage has driven rising salaries — a key factor behind high inflation. However, real wages rose just 0.1% in May, a stark contrast to 3.2% in February and 6.5% in January, and the lower growth — alongside stricter borrowing conditions — is cooling demand and dampening inflation.
“Current inflationary pressures, including underlying ones, are declining faster than previously forecast,” the Bank said after its July 25 meeting. “Domestic demand growth is slowing. The economy continues to return to a balanced growth path.”