Russia’s economy set to be ‘unfrozen’
Experts believe the key interest rate could be cut by 2% today
An overwhelming majority of experts expect the key rate to fall from 18% to 16%. The reason is a sharp decline in inflation and the freezing of the economy. However, it is possible that the Bank of Russia may opt for a more moderate reduction. Inflation expectations among the population, according to the latest measurements, have risen to 14.9%, unemployment remains at a historic low, and wage growth continues — all of which do not favour a sustained decline in inflation. What factors will influence the decision of the Bank of Russia’s board of directors and what is currently happening in the country’s economy — in the review by the analytical service of Realnoe Vremya.
Regulator to cut rate to 16% and take a pause
Today’s meeting of the Bank of Russia’s board of directors on the key interest rate is taking place against the backdrop of a noticeable weakening of the Russian currency. For the first time since July 2025, the over-the-counter dollar rate exceeded 82 rubles. And this is only the beginning, experts warn — a strong ruble is not beneficial for the budget.
However, according to Tabakh, other options are also possible — a cut to 17% in September and a further one basis point reduction in October.
Risks of sharp inflation growth in autumn
An overwhelming majority of experts now expect the key rate to fall from 18% to 16%, says financial expert and member of the RSPP commission on banks and banking activities, Yan Art.
At the SPIEF and EEF, many state managers called for a cut in the interest rate and a weaker ruble, Yan Art recalled. The traditional argument is that a high rate hinders economic development and increases the risk of recession. However, Vladimir Putin stated that it is logical to aim for a “soft landing” of the economy and said that he considers the reduction of inflation an important achievement. “Essentially, this means that he has taken a neutral position between those advocating a cut in the rate and the ruble and those supporting the maintenance of current monetary policy. Therefore, there has been no pressure on the Bank of Russia from the top, and Elvira Nabiullina has all the resources to defend her position,” the expert noted.
“Strict monetary conditions create a foundation for normalising interest rate policy”
Head of Debt Market Analysis at Finam Group, Alexey Kovalev, believes that the Bank of Russia will cut the rate by 150 basis points — to 16.5%.
By lowering the rate by 200 basis points in July to 18%, the Bank of Russia updated its forecast, according to which the average key rate from 28 July until the end of the year is projected to be in the range of 16.3–18%. Unlike previous estimates, the new forecast does not assume the possibility of a rate hike, but fully allows for the possibility of maintaining it at the current level until the end of 2025, the analyst emphasises.
The interest rate forecast is linked to expectations regarding inflation dynamics — the regulator maintains such strict monetary conditions (MC) as it considers necessary for a sustainable return of inflation to 4% in 2026 and its consolidation near this level. This is reflected in the fact that the Bank of Russia keeps a significant margin of the key rate above inflation. Based on the current Bank of Russia forecast for inflation at the end of December 2025 (6–7%), the real key rate should amount to 7–12 percentage points, which roughly corresponds to the average value in 2024 (9.1 percentage points).
The Bank of Russia highly values the effectiveness of its policy, noting in its July press release that the impact of strict monetary conditions on demand is increasingly evident in the reduction of inflationary pressures. This is also reflected in the statistics: according to the latest data, year-on-year inflation in Russia slowed to approximately 8.3% in August 2025, down from 8.79% in July. By way of reminder, it was 9.40% at the end of June, 9.88% at the end of May, 10.23% at the end of April, and 10.34% at the end of March this year.
Unemployment at a historic low
As for prospects until the end of 2025, the main hopes for a reduction in the key rate are linked to the trend of easing price pressures and the movement of inflation toward expected levels. Since the last meeting, inflation dynamics have been closer to the lower bound of the Bank of Russia’s forecast, allowing for a rate decision in September that would correspond to the optimistic scenario.
A somewhat “spoiling factor” in the price picture came from data on inflation expectations among the population in August 2025, which showed an increase from 13% in July to 13.5%. “Inflation expectations are an important indicator considered by the regulator when making a rate decision. For example, the July press release explicitly states that “further decisions on the key rate will be made depending on the sustainability of the slowdown in inflation and the dynamics of inflation expectations,” Kovalev recalls. “The lack of progress in their sustained decline is a significant pro-inflationary factor in the medium term, calling into question the possibility of an accelerated normalisation of monetary policy. However, this does not prevent the continuation of the easing process, as the key rate still significantly exceeds the level of inflation expectations (by 4.5 percentage points at present), which is unusual for Russian conditions.”
Some concern regarding inflation prospects arises from the labour market situation. Unemployment remains at a historic low (2.2%), while annual wage growth accelerated in June to 15% in nominal terms and 5.1% in real terms, compared with 14.5% and 4.2% in May, respectively.
Overall, in the second quarter of 2025, growth in the average accrued wage remained high (14.9% year-on-year), slowing only slightly compared with the second quarter of 2024 (16.7% year-on-year). “It is obvious that a 15% increase in wages is poorly compatible with 4% inflation” Kovalev insists. “Because wage growth exceeds labour productivity growth, the shortage of workers remains a risk factor for accelerating inflation.”
If domestic demand begins to grow rapidly again without a corresponding increase in productivity, it will quickly run into labour resource constraints. Therefore, it is no coincidence that among the main pro-inflationary risks, alongside inflation expectations, Elvira Nabiullina also cites the labour market situation.
The state of the economy requires decisive action from the Bank of Russia
In July, the Bank of Russia stated that the normalisation of budgetary policy in 2025 would have a disinflationary effect. However, it was also noted that “changes in the parameters of budgetary policy may require adjustments to the monetary policy being conducted.” Since the three-year budget draft is planned to be considered by the government in mid-September (possibly after the rate meeting), the risk from the budgetary factor may prompt the Bank of Russia to exercise additional caution in its rate move or signal at the September meeting, the analyst suggests.
In its statement following the July meeting, the Bank of Russia also indicated that geopolitical tensions remain a significant uncertainty factor.
“We expect the continuation of monetary policy normalisation at the September meeting. However, the balance of factors determining the final decision, and the accompanying signal, suggest a more moderate move than in July,” predicts Alexey Kovalev. “In addition, we believe that the Bank of Russia will seek to avoid solidifying market expectations of further rate cuts in the coming months, which would lead to a premature decline in deposit and debt instrument rates.”
The analyst leans toward a 150 basis point cut in the key rate today, while in its signal, the regulator will likely link the possibility of further reductions to inflation dynamics, inflation expectations among the population, the state of the economy, the budget, and geopolitical factors.
The state of the Russian economy requires decisive action from the Bank of Russia. According to the Ministry of Economic Development, economic growth fell to 0.4% in July, down from 1% in June. The economic slowdown is occurring in an unregulated manner and is moving into a stage of stagnation, he notes. At the same time, according to the Ministry of Economic Development, year-on-year inflation in Russia stood at 8.28% on 1 September, down from 8.43% on 25 August.
In addition, deflation was recorded at the end of August — prices fell by 0.08% in the last week. The government is also interested in a weaker ruble, and a reduction in the key rate is an important factor in achieving this goal, the economist notes.
“It should be taken into account that lowering the key rate reduces budgetary risks, as budget spending on family mortgages and subsidies for the defence industry will decrease by 200–300 billion rubles,” he listed.
The regulator’s further actions will depend on geopolitics, inflationary processes, and the state of the economy. At the same time, a potential sharp strengthening of the dollar in September–October limits the room for manoeuvre, as it raises inflationary risks that could undermine the Bank of Russia’s previous measures. Therefore, the regulator will exercise caution in its decisions, which will undoubtedly affect monetary policy and the level of the key rate.