Russia's central bank cut its key interest rate by 25 basis points to 14% on July 24, defying a market consensus for no change, while raising its 2026 inflation forecast to 6%-7% and cutting its GDP growth forecast to 0%-1%, according to the regulator's press release.

Given the growing severity of the fuel crisis in Russia and no signs of scaling back military spending, the market had judged a further cut from the 14.25% rate unlikely in the short term.

The decision marked the CBR's tenth consecutive rate cut, though the regulator has reduced the size of its moves to 25bp at its two latest meetings, as it attempts to walk a tightrope between the Kremlin's demands to help the slowing economy and reacting to inflationary spikes.

The move surprised most analysts, with 26 of the 30 economists surveyed by the RBC business portal expecting the CBR to hold at 14.25%. Only two forecast a 25bp reduction, and two assigned equal probabilities to the two outcomes.

While the outgoing head of the CBR, Elvira Nabiullina, previously saw the fuel crisis as a temporary supply shock, the bank had said this month that persistent inflationary risks had reduced the scope for further monetary easing.

In the press release, the CBR still attributed the summer increase in prices and inflation expectations largely to temporary factors, particularly a sharp rise in motor fuel prices.

"Significant price growth and the increase in inflation expectations during the summer months were largely associated with one-off factors," the CBR said.

The regulator estimated underlying inflation at an annualised 4%-5%. Seasonally adjusted price growth averaged an annualised 5% in 2Q26, down from 8.7% in 1Q26 but above 4.3% in 4Q25, while core inflation slowed to 4.2% from 6.2% in 1Q26.

The CBR raised its full-year forecast to 6%-7% from a previous range of 5.1%-5.6%, citing the increase in fuel prices and its effect on other goods and services.

"In June and July, current price growth accelerated," the CBR said, adding that "volatile components, including motor fuel and fruit and vegetable products, had a significant influence on price dynamics in recent months."

Nabiullina, in the statement accompanying the decision, said the regulator viewed the latest acceleration as temporary. "Our estimates of underlying inflation indicators remain in the range of 4%-5%," she said.

Petrol prices rose by more than 2% in some weeks during July, while diesel prices increased by more than 3%, according to Rosstat. Price growth moderated from July 14 to July 20, when petrol rose 1.66% week on week and diesel gained 1.87% w/w.

Nabiullina said the fuel price shock had started to affect a wider range of consumer prices. "Petrol is an important marker product because it accounts for a significant share of households' regular purchases and companies' costs," she said.

The rise in fuel costs also contributed to a sharp increase in inflation expectations. Households' one-year inflation expectations rose to 14.7% in July from 12.4% in June, the highest since spring 2022, while companies' price expectations increased to 20.2 points from 15.8 points, the highest since January.

Despite previously responding decisively to high inflation expectations, this time Nabiullina argued that "as the situation on the fuel market stabilises, inflation expectations may start to decline." She compared the possible trajectory with the response to the VAT increase, when expectations rose temporarily before correcting relatively quickly.

The CBR still warned that persistently high inflation expectations could prevent a sustained slowdown in price growth, and that the secondary effects of reduced production capacity in some sectors could become stronger if companies passed more of their higher costs to consumers.

"The main pro-inflationary risks are associated with a greater scale of secondary effects from the temporary loss of production capacity in individual sectors," the regulator said. "They may arise because of a more pronounced pass-through of costs into prices and high inflation expectations."

The CBR nevertheless expects inflation to return to its 4% target in 2027 and remain there thereafter. Nabiullina said the return to target would follow the exhaustion of temporary factors and the continued impact of monetary policy.

The regulator raised its projected average key rate for 2026 to 14.5%-14.6% from 14%-14.5%. It also sharply increased its forecast range for 2027 to 10.5%-12.5% from 8%-10%, signalling that monetary easing will proceed more slowly than previously expected.

"We took into account that households' inflation expectations rose significantly in July in response to developments in the fuel market, which may create secondary effects for inflation," Nabiullina said. "For this reason, and in view of the more stimulative budget, monetary policy easing should be more gradual."

The CBR described monetary conditions as moderately tight, though it said the increase in inflation expectations had slightly reduced their tightness in real terms, while non-price bank lending conditions remained restrictive.

The regulator also cut its 2026 GDP growth forecast to 0%-1% from 0.5%-1.5%. It left its forecasts for 2027 and 2028 unchanged at 1.5%-2.5% for both, which the CBR sees as a balanced long-term growth rate.

The CBR continued to warn that the labour market remained tight, though companies reported an improvement in staff availability. Wage growth slowed but continued to exceed productivity growth, while unemployment remained close to historic lows.

As in previous board statements, fiscal policy was highlighted as a major risk to the rate outlook. The CBR said government expenditure was running significantly above previous years and that the structural primary budget deficit would probably remain in place through 2028.

"Actual budget expenditure is running significantly above the levels seen in previous years. We therefore expect stronger spending growth over the year as a whole and, accordingly, a larger structural deficit than assumed in the current budget projections," Nabiullina said.

The press release warned that "if the new budget parameters envisage a higher structural primary deficit, tighter monetary policy may be required than under the current baseline scenario."

The regulator's July baseline scenario assumes the structural primary deficit will decline gradually to zero in 2029. The CBR will revise its assumptions in October after the government submits new medium-term budget proposals to the State Duma.

The CBR cut its average Russian oil price forecast by $5 a barrel to $60 in 2026 and $50 in both 2027 and 2028. Nabiullina said global oil prices remained volatile because of geopolitical developments, while the budget rule limited the direct impact of price fluctuations on the Russian economy.

The CBR said pro-inflationary risks continued to outweigh disinflationary risks over the medium term, identifying high wage growth, persistent inflation expectations, fiscal policy, weaker global economic prospects and rising global price pressure as the main threats.

The regulator said a sharper slowdown in domestic demand could produce a stronger disinflationary effect. It also acknowledged that prolonged disruption to production capacity could weaken business sentiment and consumer confidence, resulting in more subdued aggregate demand.

The CBR said it would base future decisions on inflation, inflation expectations and risks from domestic and external conditions. Its next policy rate meeting is scheduled for September 11.