Although inflation has eased slightly, the Central Bank of Russia unexpectedly cut interest rates by a small margin.

Middle East conflict has helped boost the ruble, tempering inflation, but the Russian central bank's interest rate cut was not as much as the market had expected. On Friday, the Bank of Russia lowered its key rate by 25 basis points to 14.25%. None of the 11 economists surveyed by Bloomberg predicted this result: one person expected the rate to remain unchanged, while the rest all expected a cut to 14%. The central bank stated in its announcement, "In the medium term, the risks of inflation rising are still higher than the favorable factors for curbing inflation." Reasons for this include persistently high inflation expectations, long-term wage increases, and deteriorating global economic prospects. It also mentioned that the degree of future fiscal policy relaxation over the next three years will exceed previous expectations. In May, Russia's consumer price index rose by 5.3% year-on-year, reaching a nearly three-year low, and inflation expectations for this month have also declined. The seasonally adjusted monthly price annual growth rate that the central bank focuses on is significantly below the policy target of 4%. The Bank of Russia stated in a report released this month that this round of inflation slowdown is largely due to temporary factors, with the increase in oil prices driving the appreciation of the ruble being one of them. The surge in foreign exchange earnings from crude oil exports following the outbreak of conflict in Iran has supported the ruble, which has been the best performing currency against the US dollar globally this quarter, leading to lower import costs and easing price pressures. Multiple factors have put the Naibulin team in a dilemma - the team has repeatedly emphasized that interest rate cuts will be cautious, while also needing to support the weak domestic economy. Despite the increase in oil revenues, Russia's fiscal deficit has expanded significantly, while the Kremlin continues to pour large sums of money into the conflict in Ukraine. Additionally, the Russian Ministry of Economy last month drastically lowered its economic growth expectations for 2026 from 1.3% to just 0.4%.