Russia's Central Bank Cuts Key Rate to 17% Amid Economic Slowdown, Rising Deficit

The Bank of Russia has cut its key interest rate to 17% from 18% in an effort to support the economy amid slowing growth and rising inflation pressures linked to government war spending in Ukraine. Despite this rate cut, inflation remains elevated at around 8.2%, with inflation expectations still high, complicating the central bank's goal of a sustainable slowdown in price rises. Economic growth has cooled significantly, with year-on-year growth slowing to 1.1% in the second quarter of 2025 and a quarterly contraction of 0.6%, signaling a loss of momentum and potential recession risks. The government’s increased military expenditure, which now accounts for nearly nine percent of GDP, has helped the economy avoid collapse from Western sanctions but has also contributed to inflation and a growing budget deficit, which reached approximately $58 billion in the first seven months of 2025. The central bank highlights ongoing tensions between the need to contain inflation and the necessity of supporting a wartime economy, as sectors tied to exports contract while domestic demand remains relatively stronger. Policymakers continue to monitor inflation dynamics and economic activity closely, signaling that further rate decisions will depend on inflation trends and economic stability.