Russia's Nabiullina says there is significant room rate cuts for next year

By Elena Fabrichnaya

MOSCOW, Oct 28 (Reuters) - Russian central bank Governor Elvira Nabiullina said on Tuesday that there was significant room to cut the key interest rate next year as inflation was returning towards the target of 4%.

Since hiking rates last year to 21%, the highest since the early 2000s, the bank has been gradually reducing them and on Friday cut the key rate by 50 basis points to 16.5%.

Still, many Russian companies say rates are too high, and Russia's economy is slowing because they cannot borrow.

"Since June, we have entered a cycle of reducing the key rate," Nabiullina told the lower house of parliament, the Duma. "This cycle of reducing the key rate will cover the whole of next year."

INFLATION SEEN RETURNING TO TARGET IN H2 2026

Nabiullina said the bank's updated forecasts assumed "a reduction in the key rate next year, with a favorable development of the situation and a confident return of inflation to the target, which is a significant room for reduction."

Nabiullina said it would hurt the economy to ease policy prematurely and that the space for cutting depended on inflation and inflation expectations.

The bank on Friday raised its 2026 inflation forecast to between 4% and 5% from 4% previously, partly due to a hike in VAT, and increased its average interest rate estimate for 2026 to between 13% and 15% from between 12% and 13% before.

Russian businesses say they need rates at around 12% to 14% for investment and economic growth to resume.

"Our forecast assumes that in the second half of 2026, the current rate of price growth will finally fall to the target level," Nabiullina said.

The economy ministry said that annual inflation stood at 8.14% as of October 20. The central bank expects inflation of between 6.5 and 7.0% in 2025, suggesting a moderation before the year-end.

Nabiullina said that, excluding seasonal factors, annual inflation had been between 4% and 6% in recent months, but households' inflation expectations, an important gauge for the bank, remained high.

"Unfortunately, unlike inflation, inflation expectations have not significantly decreased yet. They still seem to have remained in 2024," she said.