By Elena Fabrichnaya and Gleb Bryanski
MOSCOW, June 19 (Reuters) - The Russian central bank cut its benchmark interest rate by 25 basis points to 14.25% on Friday, a smaller move than the 50 bps that analysts had expected, citing risks stemming from soft budget policy and a decline in fuel production.
Its decision comes as Ukraine steps up drone attacks on Russia's refineries, energy and transport infrastructure, pushing gasoline prices higher and disrupting fuel supplies in some regions.
"Pro-inflationary
risks have increased due to a temporary decline in motor fuel production," the bank said - the first high-profile official confirmation of the scale of the impact of the attacks on the economy.
Russia's statistical agency said average petrol prices in Russia rose by 1% in the week to June 15, just before this week's attack on Moscow's oil refinery. Petrol prices are up 5.7% so far this year, compared with an inflation rate of 5.3%.
Some independent petrol-station chains, which do not have their own refining capacity, hiked prices by up to 20% following this week's attacks, prompting the anti-monopoly regulator to demand an explanation of their pricing policy.
The attacks have forced Russia, the world's third-biggest oil producer and a major oil and fuel exporter, to seek fuel imports by sea.
Russia has several mechanisms in place to keep fuel prices stable, including an informal agreement with oil majors not to increase their retail prices above the rate of inflation.
MORE ACCOMMODATIVE FISCAL POLICY
The strikes on the energy sector add to Russia's economic woes. Economic growth slowed to 1% last year from 4.9% in 2024, squeezed by high interest rates, Western sanctions and a strong rouble. Growth is officially forecast at 0.4% this year.
In the first five months of 2026, the budget deficit of 2.6% of gross domestic product was running above an annual target of 1.6%, due to increased military spending and despite a windfall from higher global oil prices.
The finance ministry has shifted its target for reaching a primary budget balance, which excludes debt servicing costs, to 2029 from 2027, something the central bank had warned could slow the pace of rate cuts badly needed by the slowing economy.
"Fiscal policy over the three-year horizon will be more accommodative than previously expected," the central bank said in Friday's statement.
The smaller cut will come as a disappointment for bankers and businessmen who argue that a 12% key rate is needed for investment to resume and who accuse the central bank of setting a trap for the economy with its tight monetary policy.
"The good news is that the rate cuts are continuing. The bad news is that the size of the cut has become smaller, reflecting growing pro-inflationary risks in the economy," said Natalia Orlova, chief economist at Alfa Bank.
(Writing by Gleb Bryanski; Editing by Mark Trevelyan, Kirsten Donovan)
