Analysts: by the end of the year, the key rate may drop to 16-18%

      Recently, several media outlets reported, citing their sources, that at the next meetings, the Bank of Russia may lower the key rate again, which recently dropped from 21% to 20%. We asked the analysts what forecast they could give for the key interest rate and whether there really is a high chance of its further decline. According to experts, it is quite possible to expect a decrease to 16-18% by the end of the year.

      Natalia Milchakova, Leading Analyst Freedom Finance Global:

      "We predict that if annual inflation slows down again in June, on July 25 the Board of Directors of the Central Bank of the Russian Federation will decide on another reduction in the key rate by 1-1.5 percentage points, respectively, to 18.5-19% per annum, while we estimate the probability of this event at 60%.

      Maintaining the key rate is also possible with a probability of 40%, but if annual inflation rises again in June. In May, according to Rosstat, annual inflation dropped below 10% for the first time.

      The declining weekly consumer price inflation figures speak in favor of a further reduction in the key rate in July. However, unstable inflation expectations and very unstable indicators of inflation observed by the population speak in favor of maintaining the key rate, since it is very difficult to identify a clear trend in the observed inflation using sociological surveys. If the ruble becomes much cheaper in July, then, through an increase in inflation expectations, the exchange rate may affect the change in the inflationary trend towards growth. The conflict between Israel and Iran may lead to disruptions in the supply of certain types of vegetables and fish to Russia, and although these supplies can be replaced, it is possible that inflation will not slow down for some types of fruit and vegetable products. So the question of what decision the Central Bank of the Russian Federation will make on the key rate in July remains open due to the large number of external inflationary risks.

      It is also possible that the regulator will reduce the key rate by 1-1.5 percentage points in July, but will take a long break at the autumn meetings, possibly until 2026. Accordingly, there is a high probability that by the end of 2025 the key rate may be reduced to a maximum of 18.5% per annum, and a more significant reduction will be postponed to 2026."

      Olga Belenkaya, Head of the Macroeconomic Analysis Department at Finam Financial Group:

      "The Central Bank kept the key rate at a record level of 21% for more than 2 quarters (since October last year) and in early June lowered it to 20%, but left a neutral signal, explaining that pauses between steps and even an increase are possible. rates, including at the next meeting on July 25.

      Nevertheless, a positive factor can be considered that, as follows from the Summary of the key rate discussion published on Friday, most participants agreed that enough data has accumulated to confirm the sustainability of economic trends leading to a decrease in inflation to 4% in 2026. We believe that the regulator's further decisions on the rate will depend on the trajectory of inflation and its forecast. The regulator makes it clear that pro-inflationary risks still prevail, which requires caution. Nevertheless, taking into account the Central Bank's management's statement that inflation, GDP growth and credit growth are developing near the lower limit of the April base forecast of the regulator, we believe that at the July meeting, the Central Bank's forecast for inflation and GDP may be revised downwards, as well as the forecast of the average key rate.

      In the meantime, our forecast of the average key rate for this year coincides with the lower limit of the April forecast range of the Central Bank (19.5-21.5%) and assumes a reduction in the key rate to 16% by the end of the year and to 18% by the end of the third quarter. Most likely, the Central Bank will be careful both in steps to reduce the rate and in signals in order to prevent economic agents from expecting a further accelerated decline and a sharp switch from a savings model of behavior to a consumer one."