Russian central bank slashes key rate by 200 bps in biggest cut since May 2022

By Elena Fabrichnaya and Gleb Bryanski

MOSCOW (Reuters) -The Russian central bank cut its key interest rate by 200 basis points to 18% on Friday, as expected, hoping to revive lending and boost economic growth after data showed inflation was slowing down.

The move is the biggest decrease since May 2022, when the central bank cut by 300 bps as the economy was recovering from the initial shock from Western sanctions following the launch of Russia's military action in Ukraine earlier that year.

The latest reduction was in line with a Reuters poll of 27 economists.

The central bank had raised rates substantially since July 2023 in order to deal with the effects of an overheating economy caused by a surge in military spending. Russia's economy minister had said last month the country was on the brink of recession as a result.

Alongside its sharp rate cut, the central bank lowered its 2025 inflation forecast to between 6% and 7% from between 7% and 8%.

"Current inflationary pressures, including underlying ones, are declining faster than previously forecast," the central bank said in a statement.

"Domestic demand growth is slowing. The economy continues to return to a balanced growth path," it said.

The bank added it would keep monetary conditions as tight as necessary to return inflation to the target of 4% in 2026.

Russia's consumer price index fell by 0.05% in the latest week, marking weekly deflation for the first time since September 2024, which set the stage for the central bank's decision, although the bank says it looks at longer-term trends.

STRONGER ROUBLE HELPS FIGHT INFLATION

Overall price growth this year has reached 4.56%, compared with 5.06% for the same period last year. Annualized inflation slowed to 9.17% from its peak of 10.3% in March.

The central bank maintained its gross domestic product growth forecast at between 1% and 2% and said it saw some softening in Russia's tight labour market. The economy grew by 4.3% in 2024.

The bank was under intense pressure from the business community to start easing after it hiked the key rate to the highest level since the early 2000s last year. Business leaders complained that at such a rate, investment no longer made sense.

Despite this pressure, President Vladimir Putin backed the policy of the central bank, led by Governor Elvira Nabiullina, but warned the bank not to cool the economy too much. High interest rates have hit Russia's construction and coal sectors and led to a rise in bad debt for Russian banks.

Speaking just before the rate decision on Friday, Deputy Prime Minister Marat Khusnullin, who oversees the construction sector, said that a 400 bps cut was more desirable, indicating that many officials in Russia want the central bank to cut more.

Khusnullin said he expects the rate to be at the level of no more than between 10% and 12% by the end of the year.

The rouble, which rallied by 45% against the U.S. dollar earlier this year in part due to the high key rate, began to weaken ahead of the expected rate cut and touched the 80 mark against the dollar on Friday.

The stronger rouble aided the central bank in fighting inflation by making imported goods cheaper with some bankers alleging that supporting the rouble was a deliberate policy by the central bank.

(Reporting by Elena Fabrichnya and Gleb Bryanski; Editing by Mark Trevelyan and Toby Chopra)