Russia Cuts Key Interest Rate to 14.5%

The Central Bank of Russia announced a reduction of its key interest rate to 14.5% on Friday, marking the fifth consecutive cut of 50 basis points as authorities grapple with a slowing economy and heightened geopolitical risks stemming from tensions in the Middle East.

In a statement, the bank emphasized that core inflation indicators have not yet declined, leaving room for potential further cuts depending on the trajectory of price stability. “There remains a high degree of uncertainty regarding the external environment and fiscal policy parameters,” the statement read, highlighting the delicate balance policymakers face.

The decision aligns with forecasts by nine out of ten economists surveyed by Bloomberg, while a minority had anticipated a full one-percentage-point reduction. Central Bank Governor Elvira Nabiullina is scheduled to provide a briefing later this afternoon in Moscow.

Recent contractions in economic activity have intensified pressure on monetary authorities and cast doubt on official growth forecasts for the year. Persistent financial tightness, implemented to control inflation amid Russia’s ongoing military operations in Ukraine, continues to weigh on domestic economic momentum.

President Vladimir Putin recently urged officials to explain and address the slowdown, signaling growing concern at the highest levels of government.

Dmitry Polivoy, investment director at Moscow-based Astra Asset Management, noted that “uncertainty around government spending and Middle East conflicts limits the Central Bank for now, but a bolder move may come as early as June when the slowdown becomes more apparent.”

Central bankers have cited potential long-term inflationary impacts from the U.S.-Iran confrontation as a reason for caution, though the ultimate effect on domestic prices remains unclear. Concurrently, increased government spending—up 17% in the first quarter year-on-year, poses a risk of undermining efforts to curb inflation, analysts at Alfa-Bank warned.

The Central Bank stressed that rising fiscal expenditures coupled with a structural budget deficit would necessitate a tighter monetary stance than the current baseline scenario anticipates.

Russia’s inflation slowed to 5.77% in April, down from 5.9% in March, according to weekly data from the Ministry of Economy. Inflation expectations for the year dropped to 12.9% from 13.4%. The Central Bank projects annual inflation to settle between 4.5% and 5.5% by year-end.

President Putin reported that Russia’s GDP fell 1.8% in January and February, though the Central Bank continues to prioritize price stability over output contraction, describing the slowdown as a “manageable retrenchment” in an otherwise active economy.