The Central Bank of Russia lowered its key interest rate but warned that inflation remains too high amid growing concerns of an economic slowdown due to the offensive in Ukraine, AFP reported.

Russia’s economy is cooling sharply, prompting warnings that it may slip into recession or stagnation after two years of strong growth fueled by increased military spending to finance Moscow’s campaign.

Announcing a cut in rates from 18 to 17%, the bank said the economy “continues to return to a balanced path of growth,” hinting at the slowdown. A larger reduction had been expected, but according to BKS analyst Ilya Fyodorov, the “weakening of the ruble” — which hit its lowest level against the U.S. dollar since April — forced the institution to hold back.

Government spending has surged by more than two-thirds since the start of the offensive in Ukraine, with the military budget now accounting for nearly nine percent of GDP, President Vladimir Putin said. This helped Moscow avoid forecasts that Western sanctions would crush its economy but led to a sharp rise in inflation.

The bank has been gradually lowering rates from 21% — their highest level in two decades. Nevertheless, inflation remains above eight percent, more than twice the government’s official target, with the institution warning that price increases could persist in the coming months. Particularly concerning were higher fuel prices, which have risen after Ukrainian attacks on Russian refineries.

Overall economic growth slowed to 1.1% year-on-year in the second quarter, after exceeding 4% in 2024. Businesses have for months urged the central bank to reduce rates, which they argue are stifling the economy and deterring investment.

Russia’s public finances are also under pressure from massive military spending and weak oil prices, vital for the national economy. In the first eight months of the year, the government reported a deficit of about $50 billion — equivalent to two percent of GDP — three times higher than in the same period of 2024.

Kyiv and Washington are seeking to curb Russia’s energy revenues to deepen this deficit. U.S. President Donald Trump has already raised tariffs on India over its purchases of Russian oil and threatened to take similar measures against China. | BGNES