A flag flies above the headquarters of the Russian Central Bank on the day of a meeting, held to set its benchmark interest rate, in Moscow, Russia, September 12, 2025. REUTERS/Ramil Sitdikov

By Elena Fabrichnaya and Gleb Bryanski

MOSCOW (Reuters) - The Russian central bank cut its key interest rate by 100 basis points to 17% on Friday, less than analysts had expected, pointing to stubbornly high inflation.

"Inflation expectations have not changed considerably in recent months. In general, they remain elevated. This may impede a sustainable slowdown in inflation," the bank said in a statement.

"Proinflationary risks still prevail over disinflationary ones in the mid-term horizon," it added.

With much of its economy on a military footing and targeted by Western sanctions, Russia is experiencing a sharp slowdown, with growth expected to fall from 4.3% in 2024 to 1.2% this year. Some economists and business leaders are warning about stagnation or even recession.

Analysts polled by Reuters on September 8 predicted a 200 basis points cut, although the rouble's 5% fall this week had raised doubts about whether the central bank would ease that far.

The rouble strengthened by 0.8% to 83.85 against the dollar by 1430 GMT, reversing some of this week's losses.

"A weaker step towards reduction was the result of the rouble's depreciation due to increased lending and accelerated growth in the money supply," said Ilya Fedorov from BKS brokerage.

The rouble's rally of over 40% in the early part of this year had helped the central bank fight inflation by making imported goods cheaper. The central bank is aiming to bring inflation to its target of 4% next year.

Speaking at a news conference after the board meeting, Russian central bank governor Elvira Nabiullina said the exchange rate was taken into account but added that a monetary policy which is targeting low inflation rules out a sustainable depreciation of the currency.

STAGNATING ECONOMY

The latest data showed month-on-month deflation of 0.4% in August, a month when cheap new-harvest fruit and vegetables usually bring prices down. On an annual basis, inflation slowed to 8.14% in August from 8.79% in July.

Last October, the central bank hiked its key interest rate to 21%, the highest in over 20 years, to combat inflation, which has been spurred by high military spending on the conflict in Ukraine.

This move brought lending rates in the economy to a prohibitive 25% or more, with many enterprises no longer able to invest, and vulnerable sectors such as construction, coal and metals suffering the most.

German Gref, CEO of Russia's largest bank, Sberbank, and one of the few influential public figures in Russia who sometimes contradicts the official line, said last week that the economy was in a state of "technical stagnation".

According to statistical data, it grew by 1.1% in the second quarter, year-on-year, but shrunk by 0.6% compared to the fourth quarter, which Nabiullina explained by a one-off spike in growth.

A graph published by the central bank last week showed GDP contraction in the first and second quarters on a quarterly basis, aligning with the common definition of a technical recession.

NO RECESSION

Nabiullina argued at a news conference that there was no recession in the economy, urging economists to take into account other factors such as employment, real income, consumer demand and industrial production.

"We do indeed have a cooling of the economy. This is natural when coming out of overheating, when production capacity must catch up with demand," Nabiullina said, adding that the latest seasonally-adjusted data pointed to some growth in the second quarter.

The bank has previously said prudent fiscal policy is an important factor in keeping inflation in check. However, faced with lower energy revenues, Russia now appears set to exceed the planned deficit of 1.7% of GDP this year.

The central bank said fiscal normalisation "has not yet materialised, taking into consideration the budget deficit accumulated since the beginning of this year".

It added that the parameters of the new budget, due to be submitted to parliament this month, might force it to adjust monetary policy.

(Additional reporting by Darya Korsunskaya, Anastasia Lyrchikova, Marina Bobrova, Vladimir Soldatkin; writing by Gleb Bryanski; Editing by Mark Trevelyan, Alexandra Hudson)