Central Bank of Russia (CBR) governor Elvia Nabiullina’s plan is working. Last year she introduced a raft of non-monetary policy methods to squash Russian growth and force inflation down by artificially cooling the economy.  (chart)

It is an extreme and non-traditional way of controlling inflation. But it is working. Annualised inflation dropped to 9.4% in June, down from over 10% at the end of last year.  

“In June, seasonally adjusted monthly growth of consumer prices decelerated and was close to the target for inflation in annual terms,” the Central Bank of Russia (CBR) said in its latest monthly Talking Trends newsletter.

“Businesses and households reported a decline in inflation expectations, with business costs decelerating. However, price movements still diverge across segments, and the anchoring of inflation at the target level has yet to be confirmed. For inflation to steadily decline to 4% and stabilise at this level, tight monetary conditions will need to be maintained for a sustained period,” the CBR added.

Nabiullina has been struggling to control inflation and hike the key rate to a crushing 20% (there was a token 100bp rate cut in June too), as she has no control over the main cause of inflation – unrestrained total military spending which now accounts for some 24% of GDP – her only option was to crash land growth in the parts of the economy she can influence: mortgage lending, corporate and retail lending,  and stamping on state-owned enterprises (SOEs) borrowing, among other things.

And the slowdown has been dramatic. The economy contracted in the first quarter of this year in real terms despite putting in a nominal 1.4% expansion. This year, the forecast for growth is around 2%, down from the 4.3% of growth Russia has put in over the previous two years. The slow down has led to a lively unusually public debate over if the economy is sliding into recession or if it is merely cooling. The jury is still out on that question.

However, things seem to be going in the right direction, according to the CBR, and if inflation falls far enough, fast enough, then Nabiullina will be able to head off recession and rescue companies struggling to pay their financing costs, by starting to cut rates again – possibly as soon as before the end of this year.

Most experts surveyed by RBC expect that the Central Bank will cut the rate to 18-19% at the meeting on July 25. The regulator itself diligently warns about the harm of inflated expectations: a premature rate cut will have the opposite effect, the Central Bank will act carefully, Nabiullina warned at the beginning of the month.

The Central Bank emphasizes that the high rate provides “rigidity that simultaneously promotes a further reduction in inflation to 4% and the return of the economy to balanced growth rates.” The final decision on the rate will most likely be made taking into account the latest inflation data for July and signals from domestic demand, Kommersant notes, and judging by the current rhetoric, we should not expect an accelerated easing of policy yet,The Bell said in a commentary. 

Growth up, inflation down

“Russia's economy showed signs of moderate growth in the second quarter of 2025 following a slowdown from the late-2024 peak, with stable exchange rates and tight monetary policy helping to anchor inflation,” according to the Talking Trends bulletin released on July 16.

Flash data for June indicated weaker dynamics compared to April and May, with monthly inflation in annualised terms approaching 4%. “This comes as a sign of, among other things, the impact of the foreign exchange channel of monetary policy in terms of the pass-through effect of a stronger ruble,” the CBR’s  Research and Forecasting Department noted.

Consumer price growth between May and June was subdued in categories dominated by imports or reliant on retail credit, while prices in market services—largely driven by rising incomes—continued to rise more briskly. The central bank underscored that “it is imperative to keep the downward trend on track even in the context of strongly diverging movements in prices for individual products and services.”

After a contraction in the first quarter relative to late 2024, data for April and May suggested a return to GDP growth, the CBR said. “Indicators covering production, consumption, lending, employment, and corporate defaults supported this recovery,” although June surveys pointed to only moderate demand, the CBR added.

These results were backed up by the latest production manufacturing survey index that showed a cooling of economic activity taking the S&P Global PMI index below its 50 no-change bench mark  to 48.5 in June.

The ruble has held firm since mid-May after outperforming in the first quarter, underpinned by stable trade flows and a consistently tight monetary policy. However, rapid changes in the value of the ruble to the dollar this year has caused companies losses thanks to the “Kudrin’s scissors effect” due to the delay between booking dollar revenues from exports and paying taxes later in rubles.

“The unchanged tight monetary policy stance is invariably a major contributor to exchange rate stability,” the CBR’s bulletin said.

Interest rates on time deposits and federal bonds with permanent coupon income have fallen, though lending rates remain less responsive to recent reductions in the central bank’s key rate. Monetary conditions remain tight overall, with further policy decisions to depend on the pace of disinflation and the balance of risks to meeting the 2026 inflation target, which remains at the target rate of 4%.

The Bank warned that the lag between productivity and wage growth, as well as volatility across different price categories, could complicate assessments of persistent inflation.

“The tightness of monetary conditions should be consistent with persistent components of inflation,” the CBR said, adding that such assessments have become less reliable due to “major differences in price growth across different categories.”