Predictions for the dollar and VTB's key rate reduced to year's end
In a move that signals a shift in monetary policy, the Bank of Russia has lowered the key rate for the second time this year, reducing it by 2 percentage points to 18% on July 25. This decision comes as analysts' forecasts predict a gradual decline in the key rate over the coming years.
The latest rate cut follows the first reduction, which occurred on June 6. According to Bank of Russia data, the estimates for the key rate are 3.9-4.2 rubles lower than the May responses, indicating a more optimistic outlook for the Russian economy.
The expected key rate for the Bank of Russia, according to analysts' forecasts from July 2022 through to the end of 2025 and beyond, is as follows:
- For 2025, the average key rate is forecasted to be around 19.3% per annum, with an implication that the average for the remainder of 2025 will be about 17.4% per annum.
- For 2026, the forecast lowers slightly to 13.8% per annum.
- For 2027, the forecast slightly increases to 10.2% per annum.
- By the end of the forecast horizon, the key rate is expected to be around 8.5% per annum, which is still above the neutral key rate estimated at about 8.0%.
These forecasts reflect analysts' expectations as of July 2025 and show a gradual decline in the key rate over the coming years after a high level in 2025. This aligns with the Bank of Russia's anticipated approach to monetary policy given inflation trends and macroeconomic conditions.
Inflation forecasts for Russia indicate a downward trend. The central bank expects about 6.8% inflation for 2025, with inflation expected to approach 4% by 2027-2028. These inflation projections likely influence the key rate projections.
On July 31, the dollar fell by 3.8% to 77.9 rubles, while the euro is trading above the 91 ruble mark. Sberbank, a prominent financial institution, has forecasted that the key rate will decrease to 16% by the end of the year and that the dollar will be at 90 rubles by the same date.
The Bank of Russia's next rate-setting meeting is scheduled for September 12, where further rate cuts could be on the table. Central Bank head Elvira Nabullina has allowed for a further key rate cut of 100, 150, and 200 bps at separate meetings.
The July CB survey, which involved economists from more than 30 organizations, also indicated expectations for a stronger ruble over the next three years. The official exchange rate of the ruble on July 31 was 81.83 rubles per dollar and 94.95 rubles per euro.
References:
[1] Bank of Russia. (n.d.). Key rate. Retrieved from https://www.cbr.ru/keyrate/
[2] Bank of Russia. (n.d.). Monetary policy forecast. Retrieved from https://www.cbr.ru/statistics/forecast/
- As the Bank of Russia reduces the key rate, there could be potential implications for businesses, as lower interest rates often mean lower borrowing costs and increased investment opportunities.
- According to Sberbank, a prominent financial institution, the key rate is expected to decrease to 16% by the end of the year, which may positively impact the finance sector by reducing lending costs for both businesses and individuals.
