Three steps back: the market expects the key rate to decrease to only 19% by the end of 2025

The key rate will decrease to 19% by the end of 2025, according to Izvestia's consensus forecast. The market expects that the rate will be lowered for the first time in the summer. A slowdown in lending and a decrease in demand for goods and services in the Russian Federation make it possible to gradually achieve a steady trend towards slowing inflation. However, the Central Bank will act carefully. More drastic steps are possible only in two cases: if the economy slows down too quickly, or if the Ukrainian conflict is resolved, which most analysts do not include in the baseline scenario. What else the regulator will focus on is in the Izvestia article.

What will be the key rate in 2025

The key rate may drop to 19% by the end of 2025. More than half of the 20 financial market analysts surveyed by Izvestia adhere to this option in the basic scenario. In addition, nine other experts admit a slightly more drastic decrease: by 3 percentage points, to 18%.

In a positive scenario, experts assume a reduction in the key rate to 16% or 17%, according to the Izvestia consensus forecast. And in the negative, the level will not fall below 20%.

The Central Bank will be able to begin easing monetary policy in one meeting, on July 25, analysts say. Most of them believe that the regulator will act carefully and reduce the rate in slow steps, by no more than 1 percentage point at several meetings.

Photo: IZVESTIA/Eduard Kornienko

The key rate has been at a record 21% since the beginning of the noughties for more than six months, said Olga Belenkaya, head of the Macroeconomic Analysis Department at Finam. At the April meeting, the Central Bank switched from a moderately hard to a full-fledged neutral signal. This means that the regulator is no longer threatening the market with a rate hike. In general, we can say that its growth cycle is over — the only question is when and how quickly it will begin to decline.

A reduction in the rate is possible only with a full set of inflation data for April-May, which will appear only by the summer meetings, said Pavel Biryukov, an economist at Gazprombank. Only after making sure that the trend towards slowing price growth is stable will the regulator decide to weaken the PREP.

"The development of events is still closest to the scenario of a "soft landing" of the economy, which assumes a slowdown in inflation and a return of real GDP growth to a balanced level of 1.5–2%," explained Igor Rapokhin, senior analyst at SberCIB Investment Research.

At the same time, there is a high probability that annual inflation this year will not fall to the 7% projected by the Central Bank, said Natalia Milchakova, a leading analyst at Freedom Finance Global. Judging by the dynamics of consumer prices in March and April, they will not slow down quickly.

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How does the key one affect the economy

There is still hope for a more rapid easing of the Central Bank's policy, Sovcombank believes. Its chief analyst, Mikhail Vasiliev, noted that a strong slowdown in lending would make it possible to achieve a steady decline in inflation. The actions of the Central Bank affect the economy with a lag of two to three quarters, which means that the effect of the record high level of inflation is particularly active right now and will persist for quite a long time.

"The Central Bank may take a more active reduction in the key rate in order to prevent the risks of excessive hypothermia of the economy," Mikhail Vasiliev explained.

Photo: IZVESTIA/Pavel Volkov

Now the Bank of Russia is trying to slow down demand in the country in order to allow production to increase its production capacity and prevent a shortage of goods. A sharp reduction in the rate will mean that demand has fallen faster than the regulator had planned, which is already a negative signal for the economy as a whole.

At the same time, the Central Bank has not yet included in the base forecast a possible improvement in geopolitical conditions, as it builds its policy only on facts, said Olga Belenkaya from Finam. Hypothetically, if US President Donald Trump's plans to end the Ukrainian conflict come to fruition, there may be an opportunity for a more rapid mitigation of the PREP.

The possible lifting of sanctions, a reduction in budget spending and the restoration of the labor market can also significantly improve the economic situation of the Russian Federation and help slow down inflation.

However, the head of the Central Bank, Elvira Nabiullina, at a press conference after the April rate meeting, drew attention to the negative consequences of Trump's policy, which could create problems for Russia.

— The main topic after the previous meetings was the revision of import duties in the world's largest economies. Because of this, we lowered our forecast for global economic growth in the medium term. Lower global demand will lead to lower commodity prices — we have reduced the forecast by $5 per barrel this year, to $60 per barrel," Nabiullina said.

Photo: RIA Novosti/Maxim Blinov

The budget will have a key impact on monetary policy, says Yuri Kravchenko, head of the Banking and Money Market Analysis Department at IC Veles Capital. The higher the deficit, the more OFZ the Ministry of Finance will issue to finance it, in other words, actually creating new money in the economy and driving up inflation.

However, in May, the Ministry of Finance has already tripled the forecast for budget shortfall for 2025, to 3.8 trillion rubles. So the Central Bank is likely to choose the option to remain cautious.

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Even with a slight decline, the key Russian market can be greatly revived due to the influx of investments, including from foreigners. Demand for stocks falls during a high-interest period, so when the PREP is mitigated, companies will more actively attract financing through an IPO, and people will withdraw some of their funds from deposits and send them to the stock market.

Due to this, the value of the securities of the largest companies will also grow — by the end of the year we may well see the Moscow Exchange index at 3,700 points, Natalia Milchakova from Freedom Finance Global predicted.