The board of the Central Bank of Russia (CBR) resolved to cut its key interest rate by 25 basis points (bp) to 14.25% at the policy meeting on June 19, according to a press release from the regulator.

While the CBR managed to curb inflation below 6% in 2025, a spike in inflation was seen at the beginning of 2026, mostly due to regulatory changes and the VAT hike. The CBR dismissed inflationary pressure in early 2026 as a one-off and has since cut the key interest rate three times in February, March, and April, bringing the rate to 14.5%.

In June the CBR defied the market that expected a 50bp cut and the Kremlin that pushed for faster cut cuts. The press release warned that despite easing inflationary pressures it will not tolerate out-of-control fiscal spending.

Previous reports suggested that the finance ministry was bracing for up to $55bn military overspend in 2026 alone. Ministry and CBR officials reportedly proposed reducing military spending, but President Vladimir Putin reportedly refused and instructed the finance ministry to find savings elsewhere in the budget while leaving defence allocations untouched. 

Possibly wary that fiscal pressure might dissuade the CBR from cutting the key rate, Putin made a rare call for the regulator to make a decisive rate cut on June 19.

The CBR seemed to opt for a compromise. While still cutting the rate, it did so with a 25bp step, while the previous 8 consecutive cuts were done with a 50bp step. The regulator still warned that it now sees budget policy over the three-year horizon as “more stimulative than previously expected."

The CBR now believes that "maintaining the primary structural budget deficit until 2029 may require tighter monetary policy than assumed in the baseline scenario." 

Speaking at the press-conference after the decision, outgoing CBR head Elvira Nabiullina said that virtually all members of the board agreed that "the room for further rate cuts has narrowed", underscoring the regulator's growing concern about fiscal stimulus, accelerating lending growth and other pro-inflationary risks.

The central bank retained a cautious forward guidance, stating that it "will assess the necessity of further key rate reductions at upcoming meetings depending on the sustainability of inflation deceleration, inflation expectations and risks stemming from domestic and external conditions." 

The press release argued that "economic growth continues at a moderate pace after a temporary decline at the beginning of the year" and that underlying inflation "has decreased somewhat, but generally remains in the range of 4-5% in annualised terms". 

The CBR acknowledged that inflation expectations among households and businesses have declined but said they remain elevated and "may impede a sustainable slowdown in inflation". 

Labour market pressures remain a concern for the policymaker. The CBR said the easing of labour shortages has slowed and that the share of companies reporting staff shortages has stopped declining. Although corporate wage indexation plans for 2026 have moderated, wage growth continues to outpace productivity growth, while unemployment remains near historic lows, the press release said.

The CBR noted that monetary conditions have continued to ease but remain restrictive overall. Interest rates declined across most financial market segments, although medium and long term OFZ yields increased. According to the CBR, this rise "is not a sign of tighter monetary conditions" but is primarily linked to uncertainty surrounding future budget plans. Non-price lending conditions also remain tight.

The regulator cited elevated inflation expectations, prolonged wage growth exceeding productivity gains, deteriorating global economic prospects and increasing geopolitical tensions as key inflationary threats. 

The regulator also noted rising inflation risks linked to temporary declines in motor fuel production, echoing recent concerns that Ukrainian drone attacks on Russian refineries will feed into inflation through fuel prices.

Nabiullina also highlighted this concern during her June 19 press conference, warning that "higher petrol prices may also affect inflation expectations, as this is a fairly sensitive product both for households and for companies."

Despite these concerns, the regulator maintained its inflation outlook. The CBR forecasts annual inflation at 4.5-5.5% in 2026 and expects underlying inflation to be close to the target 4% during 2H26. Annual inflation is projected to return to the official 4% target in 2027 and remain there thereafter.

The next CBR policy board meeting is scheduled for July 24.