Russian Central Bank Reduces Key Interest Rate to 16% Amid Persistent Inflationary Concerns

Central Bank Implements Fifth Consecutive Rate Cut

The Central Bank of the Russian Federation announced on Friday, December 19, 2025, a reduction in its key interest rate by 50 basis points, bringing it down to 16%. This decision marks the fifth consecutive rate cut implemented by the central bank this year, continuing a gradual easing from a peak of 21% reached in September 2024. The move was largely anticipated by market analysts.

In its official statement, the Bank of Russia indicated that 'the economy continues to return to a balanced growth path' and that 'underlying measures of current price growth declined in November'. However, the central bank also highlighted that 'inflation expectations have edged up in recent months' and 'lending activity remains high', factors that contribute to persistent inflationary pressures.

Monetary Policy to Remain Tight for 'Prolonged Period'

Despite the rate reduction, the Central Bank reiterated its commitment to maintaining a tight monetary policy for a 'prolonged period' to ensure inflation returns sustainably to its target. The bank aims to bring annual inflation down to 4%–5% in 2026, with underlying inflation expected to reach 4% in the second half of 2026, and to remain on target in 2027 and beyond. As of mid-December, annual inflation stood at 5.8%.

Central Bank Governor Elvira Nabiullina underscored the ongoing challenge, stating that it was 'too early to declare victory over inflation'. She likened the situation to a marathon, noting that 'one month of low inflation is not enough' and that the 'second half of the race is harder than the first'.

Addressing Elevated Inflationary Risks

Policymakers identified several factors contributing to elevated inflationary risks. These include persistent high inflation expectations, robust credit activity, and broader geopolitical factors. Concerns also stem from a planned increase in Value Added Tax (VAT), which could exert upward pressure on prices. Furthermore, potential declines in global oil prices for Russian blends could impact the ruble's exchange rate, leading to pro-inflationary effects. The tight labor market, characterized by historically low unemployment and wage growth outpacing labor productivity, also poses an inflationary risk.

The central bank's strategy involves suppressing non-military economic activity to prevent the significant fiscal outlays related to wartime spending from translating into runaway inflation. While the decision to cut rates was widely expected, some analysts had hoped for a more substantial reduction to stimulate economic growth, which is projected to be between 0.5% and 1% this year. Following the announcement, the Russian ruble saw a slight strengthening against major currencies.