Yevgeny Goryunov, Head of the Gaidar Institute's Monetary Policy Department, commented for the Bank of Russia's decision to lower the key rate on December 19.
"The easing of policy was expected, and the only question was how much the rate would be cut. The regulator chose to act cautiously, lowering the rate by 50 basis points from 16.5% to 16%. This is a fairly conservative move, given that the main inflation indicators are already very close to the target level," the expert said.
He noted that inflation is rapidly losing momentum: “At the moment, price growth (taking into account seasonal factors) has practically stopped. At the same time, inflation has been steadily declining over the past six months, and it is highly likely that by the end of 2025, annual inflation will fall below 6%, as confirmed by the regulator itself in a press release.”
Evgeny Goryunov also pointed out the major risks and assessed the state of the economy: "The most likely inflationary risks include the risk of falling oil prices, followed by a weakening of the ruble and higher import costs, as well as a one-time shock caused by a VAT increase. The Bank of Russia's estimates suggest that the Russian economy is currently above trend, or, in other words, output is currently exceeding potential GDP. These estimates seem somewhat overstated, although the far-from-normal state of the labor market speaks in favor of a positive output gap," the expert said.
However, he questioned some of the other arguments used by the Central Bank to justify its caution. Commenting on the inflationary risks associated with geopolitics and expectations, Evgeny Goryunov said: "This argument does not seem particularly convincing. First, geopolitical tensions have remained high in recent years, and there are currently no clear signs of them intensifying. The presence of such a backdrop leads to higher commodity prices (due to the inclusion of a risk premium), but this does not mean higher inflation. Second, there are currently insufficient grounds to believe that inflation expectations have a significant impact on price dynamics. In this sense, there are doubts about making the decision on the rate dependent on the dynamics of inflation expectations, unless there are signs of their obvious strong growth," the expert noted.
“Overall, the policy being pursued will contribute to a further slowdown in inflation, while the likelihood of a recession in 2026 is increasing,” Evgeny Goryunov concluded.