As Expected, CBR Kept Key Rate Constant at 21% on March 21
Bottom Line: As we predicted, Central Bank of Russia (CBR) kept the policy rate constant on March 21 for the third consecutive time to combat price pressures. CBR signaled that it is unlikely that further tightening is needed for disinflation, and stated that current inflationary pressures have decreased but remain high, especially underlying ones as demand continues to outstrip domestic capacity. We foresee a Russia-friendly deal in Ukraine following talks between the U.S. and Russia could ease some pressure on inflation and alleviate demand-supply imbalances. CBR could consider reducing the rates afterwards, but this will depend on how peace negotiations will proceed in spring 2025.
Figure 1: CPI, Core Inflation (YoY, % Change) and Policy Rate (%), January 2015 – March 2025
Source: Continuum Economics
The CBR held its second MPC meeting of the year on March 21 and kept the key rate unchanged at 21%. Despite the interest rates remain at their highest level in two decades, it appears this has so far failed to soften rising inflation since the ongoing war in Ukraine exacerbates economic capacity constraints. We feel any interest rate cuts seem unlikely before H2 2025 under current circumstances since we think there are no signs of a significant inflation slowdown in the horizon yet.
CBR said in its statement on March 21 that current inflationary pressures have eased but remain high, especially underlying ones. CBR highlighted that key inflationary risks are linked to economic overheating, high inflation expectations and deteriorating foreign trade conditions as a result of sanctions. The regulator added that achieving its inflation target of 4% would require a prolonged period of maintaining tight monetary conditions in the economy. In line with this, CBR governor Nabiullina recently emphasized that price pressure remains high, and inflation expectations elevated meaning that CBR should maintain tight monetary conditions for a long period.
Despite inflation remains high, we feel the pass-through of the earlier RUB weakening to prices, which increased in December 2024, partly soothed in 2025. RUB gained about 28% of its value against the USD in 2025 on expectations of easing tensions between Russia and the U.S. and a peaceful settlement in Ukraine. We think acceleration in inflation is constrained by a stronger RUB.
We are of the view that risks to the inflation outlook remain upside as the fiscal policy is making a big contribution to domestic demand, coupled with high military spending, rising wages and surging inflation expectations, while there are no signs of a significant inflation slowdown in the horizon yet. (Note: We feel inflation will likely peak at around 10.3%-10.5% YoY in April.)
We foresee a Russia-friendly peace deal in Ukraine following immediate talks between the U.S. and Russia could ease some pressure on inflation, alleviate demand-supply imbalances within Russia's economy, and be a relief for war-torn economy. CBR could consider reducing the rates afterwards, but this will depend on how peace negotiations will proceed in spring 2025.