Interest rates: analysts expect a pause, Putin demands a cut

The Central Bank’s rate-setting meeting on July 24 comes amid a surge in inflation driven by the fuel crisis and loud calls for another rate cut. This week, Vladimir Putin described cutting the key rate as “a natural process”. Anatoly Aksakov, chairman of the Duma's financial market committee, expects the bank to make another symbolic cut of 25 basis points to 14%. But inflation figures suggest the opposite: the room for easing monetary policy is disappearing.

Inflation surges

In June, the seasonally adjusted annual rate of inflation (SAAR) leapt from 2% to 10.6%. The Central Bank described this as a one-off, mostly due to the gasoline and diesel shortages. Excluding the most volatile components (fuel, fruit and vegetables and some services) the inflation rate would not have exceeded 4.9%, it said.

However, in its closely watched “What the Trends Say” bulletin, Central Bank analysts warned that the fuel shock is spilling into other prices. The growing number of items showing rapid price increases reflects the “steady follow-through of higher fuel costs to final prices” which was already seen in June, it said.

The fuel crisis is a supply shock, the bank’s experts point out. Thus, it cannot be addressed directly by interest rates. Their decision is based on its secondary effects and its impact on inflation expectations. Amid queues at gas stations and restrictions on sales in 80 of Russia’s 89 regions, it would be odd not to anticipate that the public and businesses expect inflation to jump. According to Deputy Governor Alexei Zabotkin, the Central Bank cannot “close its eyes” to fuel prices and inflation expectations. However, he said the bank hopes that government efforts will bring the situation under control and expects a “calibrated monetary policy” will see price rises back on track for Russia’s 4% target by next year.

Despite the bank’s attempts to reassure, analysts it surveyed sharply hiked their predictions for inflation and the key rate. The experts expect inflation will be 6.2% this year, up from the previous forecast of 5.3%. Next year they expect inflation will be 4.6% (up from 4.4%). The average key rate they expect to see in 2026 is 14.5% (up from 14.1%) this year, 12.2% (up from 10.6%) in 2027 and 10% in 2028 (up from 9%).

The bank’s business climate indicator plummeted to -3.6 points from 0.9 in June. Firms’ short-term demand expectations continue to decline, while price expectations were up after five months of decline.

Why the world should care

The Central Bank’s data and statements suggest it will opt for a pause in rate cuts. Before the fuel crisis, monetary policy was working: underlying inflation was less than projected for the second half of the year. But the fuel shock wiped out that progress and risks triggering secondary effects.

At the July 24 policy meeting, the Central Bank will also update its economic forecasts. In current circumstances, it is sure to downgrade growth expectations and the future path for interest rates will likely flatten. A cut of 25 basis points is possible, but a pause seems much more likely. Even a symbolic rate cut, with the current figures and related uncertainty, would undermine the Central Bank’s own reputation as a prudent rate-setter, something which in itself is a powerful tool.