Russia’s central bank issued a surprise 100bp rate cut in May, while maintaining a hawkish stance. Subsequent data and remarks suggest a possible rate cut at the 25 July meeting due to softer CPI data.
Russia’s seasonally-adjusted annualised inflation rate fell to 4.5% in May from 6.2% in April, nearing the 4% target. This trend implies year-on-year inflation might align with the lower-end of CBR’s 7%-8% forecast for end-2025.
Forecast Update
The forecast will be updated before the next meeting. The USD/RUB exchange rate is not expected to have noticeable changes due to these developments.
The Bank of Russia unexpectedly lowered its benchmark rate by 100 basis points in May, but did so whilst holding a tighter policy tone in its communication, indicating a preference for caution. The key reason behind this apparent contradiction lies in the recent drop in inflation — which is beginning to move more comfortably towards its official target.
We’ve now seen annualised inflation, adjusted for seasonal effects, slide to 4.5% in May. That’s quite a move down from April’s 6.2%, and it places the figure within touching distance of the 4% target. What this means in real terms is that the central bank’s inflation control measures — which had been stern — are, in part, yielding the intended effects. There’s a reasonable argument to suggest that if these figures hold, or move even slightly lower in June, the monetary authorities may ease again at the 25 July meeting.
Current forecasts have inflation ending 2025 in the 7%-8% range. But recent monthly figures suggest that outcome might lean more towards the 7% boundary, or potentially even lower, if momentum sustains and geopolitical disruptions remain broadly contained. The central bank has already mentioned that it will revise these projections before the upcoming policy review, and we will be particularly alert to any downward shift in inflation expectations.
Rouble Stability and Investment Strategy
The rouble, however, is unlikely to see wild swings. Despite the rate adjustment in May, the USD/RUB exchange rate has held comparatively steady. It reflects a broader backdrop where currency movements are being shaped more by trade flows, sanctions pressure, and commodity prices than interest rate tweaks. So for now, we’re not expecting sharp moves in either direction as a direct result of monetary policy adjustments.
Given the recent policy tone and steady FX response, we’re viewing this setup with a calm approach for positioning in interest rate instruments. It makes sense to monitor forward rate agreements and rate expectations in rouble-denominated futures, particularly as we lead up to the July policy decision. There’s a potential space here if rates ease further while the policy tone remains unchanged — a divergence which may open opportunity depending on how the curve behaves and how much easing has been priced in already.
We’ll keep a close eye on verbal signals from Nabiullina in the coming days, especially anything in the runup to the forecast publication. Any conflict between her tone and the economic data could provide early entry points. Remember, much of what’s unfolding hinges on July’s CPI print and the updated macro forecast — and we don’t expect any policy change to be made lightly, especially after such a substantial cut last month.
It’s also worth considering how these changes feed into implied volatility. If short-term rate moves become more frequent or less predictable, options tied to rates might show notable shifts. We’d view low implied volatility at this point as a potential entry, especially considering the central bank’s mixed signals of easing and remaining vigilant. Timing is essential here.
Keep positioning nimble, particularly along the front end of the curve. If surprised again, as we were in May, yields could respond quickly, and with limited time for recalibration.
