Sergey Drobyshevsky, Principal Researcher at the Gaidar Institute, discussed possible trajectories for changes in the Bank of Russia’s key rate and its impact on the Russian economy.
"By the end of the year, the Bank of Russia may lower the key rate to 14.5–15%, while inflation (in annual terms, December to December), according to our estimates, will not exceed 6%. However, a sharper reduction in the key rate, given the persistence of high inflation expectations and the unstable dynamics of the ruble exchange rate (and the exchange rate is quickly reflected in the prices of non-food goods and through expectations), could lead to an acceleration of inflation to the levels we saw last fall (i.e., 0.5–0.8% per month, instead of 0.3–0.4%), reaching 7–9% by the end of the year, which would force the regulator to raise the rate again instead of continuing its smooth and gradual decline.
Sergey Drobyshevsky explained that when making decisions on the key rate, the Bank of Russia relies not only on current dynamics and inflation forecasts, but also on a wide range of macroeconomic indicators, such as inflation expectations, exchange rates, lending and monetary aggregates dynamics, budget deficits, output gaps, unemployment rate, etc. "From the point of view of inflation dynamics over the last three months, there is a possibility of a more sharp reduction in the key rate, but we see that inflation expectations remain high, there was a noticeable weakening of the ruble in September, and the growth rates of lending and monetary aggregates returned to positive territory, the budget deficit exceeds the planned values, and unemployment remains at abnormally low levels. From the point of view of output dynamics, the current situation with a halt in growth can be characterized as the end of the “overheating” period (positive output gap), when the economy returned to a trajectory of long-term sustainable growth, and in the fall of 2025, we can expect a transition to positive growth rates in industrial production and GDP, albeit at a slower pace than in 2023–2024," the expert noted.
According to Sergey Drobyshevsky, the slowdown in GDP growth is primarily due to the exhaustion of low-cost import substitution opportunities and a shortage of skilled personnel. "In terms of economic growth rates, the main contribution to their slowdown was made, after all, not by the key rate, but rather the exhaustion of the initial momentum of easy import substitution (which led to high growth rates and overheating in 2023–2024) and a shortage of the necessary personnel in the labor market, which resulted in a rapid increase in labor costs. Further import substitution and optimization of production processes (increasing labor productivity, automation, and robotization of production in conditions of labor shortages) require not so much investment as time for their implementation and some restructuring of employment (this explains the decline in labor demand in certain industries and regions), which is why we are seeing a slowdown in growth rates and new investments in fixed capital, but demand for loans from enterprises remains, and production is expanding, albeit slowly," the expert said.