The Central Bank Lowers Rate to 18% - Initiation of Monetary Policy Easing Cycle

The Board of Directors of the Bank of Russia decided on July 25 to lower the key interest rate by 2 percentage points, from 20% to 18% per annum. This marks the most significant single easing of monetary policy since 2022 and the second consecutive rate reduction in recent months. The regulator's move was anticipated by market participants, given the accelerated slowdown in inflation and signs of cooling economic activity. The rate reduction aims to invigorate lending and support economic growth while assuring that the Central Bank will maintain control over inflation risks.

The Central Bank's Decision and Its Context

The July reduction of the key rate to 18% continues Russia's shift towards a softer monetary policy. The previous reduction occurred a month earlier, in June, when the rate was lowered from a record 21% to 20%. Between 2023 and 2024, the Central Bank sequentially raised the rate from 7.5% to 21% per annum to curb inflation. However, such high borrowing costs began to slow down the economy: by mid-2025, GDP growth had significantly decelerated, and there were risks of a downturn in several sectors.

The decision to ease policy coincided with the consensus forecast of analysts and business demands. High interest rates had raised concerns among entrepreneurs, as expensive loans stifled investment and consumer demand. The business community and even some government officials had previously publicly called for a more decisive rate reduction, fearing a recession. However, the regulator chose a cautious approach, limiting the move to 2 percentage points and attempting to find a balance between fighting inflation and supporting economic activity.

Reasons for Policy Easing

The main factor allowing the Central Bank to start lowering the key rate was a noticeable easing of inflationary pressure. According to the regulator, inflation is slowing more quickly than previously expected, and domestic demand is growing quite moderately. In its press release, the Bank of Russia noted that the current price level has stabilized in recent weeks, with deflation even recorded in certain periods. Almost all key macro indicators are now moving in a favorable direction for lowering the rate. The reasons for easing policy include:

• Slowing Inflation: Year-on-year growth in consumer prices has dropped to approximately 9.2% as of mid-July, while in March inflation exceeded 10%. In June, monthly inflation (accounting for seasonality) amounted to around 4% on an annual basis, signalling a weakening of price pressures.
• Economic Cooling: GDP growth rates have decreased to about 1.5% year-on-year (data for January-May 2025), reflecting economic cooling after the robust growth of 2024. Consumer and investment activity has noticeably weakened, and money supply growth has almost stalled.
• Tightening Credit Expansion: The sharp rise in the cost of money has limited the issuance of new loans: retail lending is effectively stagnating, while corporate lending is growing much slower than a year ago. This has eased additional credit pressure on prices.

Therefore, pro-inflation risks have diminished, creating conditions for the cautious reduction of the rate. The Bank of Russia emphasized that inflation expectations among the population remain elevated (around 13% for the year ahead), and several factors, such as increased budget expenditure, may slow the return of inflation to target. For this reason, the regulator intends to maintain sufficient firmness in monetary conditions, necessary for reducing inflation to 4% by 2026. Further steps regarding the key rate will depend on the sustainability of inflation slowdown and inflation expectations dynamics.

Updated Macroeconomic Forecast from the Central Bank

Simultaneously with the rate cut decision, the regulator presented an updated medium-term macroeconomic forecast. Many key indicators have been revised for the better compared to April estimates:

• Key Rate 2025: An average of 18.8–19.6% is expected (down from 19.5–21.5% previously). For the second half of the year, the forecast has been lowered to 16.3–18% (from 18.8–21.8%).
• Key Rate 2026: 12–13% (forecast improved from 13–14%).
• Key Rate 2027: 7.5–8.5% (unchanged; a level close to neutral).
• 2028 Forecast: Average rate of 7.5–8.5%, signifying a return to neutral policy in the long term.
• Inflation: Inflation forecast for the end of 2025 has improved to 6–7% (down from 7–8%). The inflation estimate for 2026 remains confirmed at around 4% target level.
• Economic Growth: The forecast for Russia's GDP growth in 2025 remains in the range of 1–2%, and for 2026 – 0.5–1.5%. The regulator does not expect high dynamics for the economy in the coming years amid external uncertainty.
• External Account and Oil: A more modest surplus of the current account is expected in 2025 – around $33 billion (down from $38 billion previously), and for the trade balance – $104 billion (down from $111 billion previously). The deterioration is attributed to the revision of oil prices (the baseline forecast for Urals decreased to $55 from $60 per barrel) and potential import growth.

Thus, by 2027–2028, the Central Bank expects to normalize monetary conditions: inflation around 4% and a rate of approximately 7–8%. The decrease in rate projections for 2025–2026 indicates a softer policy trajectory than previously assumed, due to the reduction of inflationary risks.

Ruble Exchange Rate and Financial Markets

Following the rate cut, the ruble maintained stability: the dollar exchange rate on the Moscow Exchange remained around 77–79 rubles. This outcome was anticipated, as the easing of policy had already been factored into market expectations. Previously, the ruble was supported by a combination of high rates, export revenues, and squeezed imports, contributing to inflation control.

In the second half of the year, experts expect a moderate weakening of the ruble as imports recover and export revenues drop. The narrowing interest rate differential diminishes the attractiveness of ruble-denominated investments, which could also press on the exchange rate. However, a sharp depreciation is not forecasted – ruble assets still provide high real returns, and capital movement controls limit volatility. The Bank of Russia will factor in the exchange rate when proceeding with further easing to ensure that a weakening ruble does not spike inflation. Following a brief drop, the stock index quickly recovered, and bond yields had already accounted for the rate decrease. The initiated easing cycle generally creates favorable conditions in financial markets.

Lending and Mortgages

An extended period of high borrowing costs has significantly stalled loan growth in Russia, a fact acknowledged by the Central Bank in its forecasts. Hence, the expected growth in retail lending for 2025 has been reduced to only 1–4% (previously estimated at 1–6%). This means that the retail credit portfolio is unlikely to increase in real terms: citizens are hesitant to incur new debt due to high rates, coupled with banks tightening borrower requirements. The forecast for corporate lending growth in 2025 has been adjusted to 9–12% (previously 8–13%). Although companies are borrowing more actively than households, business credit activity has also decreased compared to last year. Mortgage lending, which has been a driver of the credit market in recent years, has also slowed. According to the Central Bank, the volume of banks' mortgage portfolios is expected to grow by only 3–6% in 2025 (forecast down from 3–8%). Government-supported subsidy programs continue to support housing loans, but their impact is no longer as vast as during the period of double-digit mortgage growth. Demand for new housing loans has cooled against a backdrop of high borrowing costs and rising real estate prices.

It is anticipated that the reduction in interest rates will gradually revive all segments of the credit market. By the end of the decade, the Central Bank forecasts a speed-up in the growth of the loan portfolio: total crediting for the economy (companies + households) may rise by 8–13% annually, while mortgages could grow by 10–15% per year by 2028. The return of rates to single digits will make loans more accessible, stimulating consumer and investment activity. In the medium term, the revival of lending should support economic growth and improve banks' asset quality by reducing the share of problematic loans.

Monetary Policy Outlook

The July reduction of the rate to 18%, according to most observers, is far from the last one this year. The management of the Bank of Russia has indicated that further decisions will depend on the trajectory of inflation, but given the prevailing trends, continuation of the easing cycle can be expected in the coming meetings. Some experts suggest that the regulator might lower the rate at each of the remaining 2025 meetings. According to several forecasts, by the year's end, the key rate could drop to about 14–15% if inflation continues to steadily decelerate towards the target.

In its official comments, the regulator maintains a cautious tone. Central Bank Governor Elvira Nabiullina emphasized that while policy is being eased, it remains tight in real terms: even with an 18% rate and 9% inflation, the real interest rate is significantly positive. This buffer will continue to cool the economy and prevent price surges. The Bank of Russia intends to balance between stimulating growth and controlling inflation. If pro-inflation risks resurge – for instance, due to a sharper depreciation of the ruble or increased budget expenditure – the regulator may slow down or pause the easing cycle.

For now, the easing is proceeding methodically. The next Board meeting of the Central Bank is scheduled for fall, and investors will closely monitor new data. Key indicators include the further price dynamics (whether the trend of slowing inflation will stabilize), the state of the ruble, and fiscal policy. In a favorable scenario, by early 2026, the key rate could return to single-digit levels, approaching the neutral range. This would mean cheaper loans, a revival in business activity, and consistently low inflation. Nevertheless, the Central Bank retains the ability to adjust its plans, which will entirely depend on the actual economic situation in the country.