The Central Bank of Russia (CBR) executed a balancing act on Friday, cutting the key rate by a smaller-than-expected 50bp to 16.5% in a 'symbolic' move. Russia’s Economic Development Ministry, which has been clamoring for lower interest rates, was quick to label the cut as only symbolic, which signals that the government will not stop pressuring the central bank for more substantial cuts, Commerzbank's FX analyst Tatha Ghose notes.

USD/RUB to rise gradually over the coming year

"The decision likely reflects CBR's attempt to balance pressure from the government and industry for lower rates amidst an economic downturn, against the need to conducting actual policy in line with CBR’s true concerns about accelerating inflation. This is why the CBR may have cut the rate on paper, but alongside, it raised its inflation forecast for 2025 to 6.5%-7.0% (around 0.5pp higher) and does not expect inflation to decline to the target level next year either. CBR noted that core inflation indicators have not changed significantly, and pro-inflationary factors increased."

"CBR is also anticipating the key rate to average 19.2% this year, implying a possible cut to 15.5%-16.0% in December again – as the same internal conflict may be assumed to continue in the coming months. For 2026, CBR sees a key rate average of 13%-15%, which marks an upward revision from before, but still implying gradual rate cuts through next year, albeit not to normal low interest rates."

"Governor Elvira Nabiullina's concerns about an overshooting budget deficit and pro-inflationary risks suggest a cautious approach with the magnitude of rate cuts. Still, CBR’s monetary policy is not a key driver of today’s artificial USD/RUB and EUR/RUB exchange rates. With US and EU sanctions mounting and the peace talks faltering, we forecast USD/RUB to rise gradually over the coming year."