Introduction to Monetary Policy
The Bank of Russia Board of Directors made a significant decision on July 25, 2025, to reduce the key rate by 200 basis points to 18.00% per annum. This move was based on the observation that current inflationary pressures, including underlying ones, are declining faster than previously forecast. Additionally, domestic demand growth is slowing down, and the economy is returning to a balanced growth path.
Current Economic Situation
In the second quarter of 2025, the current seasonally adjusted price growth decreased to 4.8% in annualized terms from the average of 8.2% in the first quarter. The similar indicator of core inflation equalled 4.5% after the average of 8.8% in the previous quarter. As of July 21, annual inflation was 9.2%. However, in July, the monthly increase in the consumer price index will temporarily rise due to significantly adjusted utility tariffs.
Impact of Monetary Conditions on Demand
The impact of tight monetary conditions on demand is becoming increasingly evident in decreasing inflationary pressures. The effects of tight monetary policy, including through the ruble appreciation, are more prominently seen in the low growth in prices for non-food products. These effects are becoming gradually evident in decreasing inflationary pressures in the segments of food products and services as well. Price dynamics remain uneven, but the scatter between consumer basket components has slightly narrowed.
Inflation Expectations
A stable downward trend in inflation expectations has not yet formed. Long-term expectations calculated from financial market instruments have slightly decreased. Inflation expectations of analysts and households have seen no significant changes. In July, price expectations of businesses edged up for the first time since the beginning of the year. Overall, inflation expectations remain elevated, which may impede a more sustainable slowdown in inflation.
State of the Russian Economy
The upward deviation of the Russian economy from a balanced growth path is narrowing. High-frequency data, including those for the second quarter of 2025, and survey indicators show a further slowdown in domestic demand growth with continued moderate growth of economic activity in general. There are more signs of a softening in the labor market, with the share of enterprises experiencing labor shortages continuing to shrink. Labor demand in certain industries has been decreasing, with a reallocation of employees across industries.
Monetary Conditions and Risks
Monetary conditions remain tight under the impact of the monetary policy pursued and autonomous factors. Although deposit rates have decreased, households continue to demonstrate a high propensity to save. Lending dynamics are uneven across segments, with unsecured consumer lending shrinking, while the portfolio of mortgage and corporate loans is moderately increasing. Proinflationary risks prevail over disinflationary ones in the mid-term horizon, with key proinflationary risks associated with a longer upward deviation of the Russian economy from a balanced growth path and high inflation expectations.
Conclusion
The Bank of Russia’s decision to cut the key rate is a significant step towards achieving its inflation target. The bank will maintain monetary conditions as tight as necessary to return inflation to the target in 2026. With the average key rate expected to be in the range of 18.8-19.6% per annum in 2025 and 12.0-13.0% per annum in 2026, monetary policy will remain tight for a long period. The bank’s forecast suggests that annual inflation will decline to 6.0-7.0% in 2025, return to 4.0% in 2026, and stay at the target further on. The next key rate meeting is scheduled for September 12, 2025, and the bank will continue to monitor the situation and make adjustments as necessary to achieve its inflation target.
