Economy

Russia’s 2025 Budget Spending Increase Expected to Delay Key Rate Cuts, According to Reuters

MOSCOW – Analysts have warned that Russia’s upcoming increase in budget spending could exacerbate inflation and compel the central bank to sustain a tight monetary policy, potentially keeping benchmark interest rates in the double digits longer than anticipated.

The Russian government recently revealed its budget figures for 2025, which include a 9% increase in spending, bringing the total to 41.5 trillion roubles (approximately $446.2 billion). The budget is projected to have a deficit of 0.5% of GDP and emphasizes military expenditures amid the ongoing conflict in Ukraine.

This budget announcement comes against the backdrop of an inflation rate hovering around 9%, significantly above the central bank’s target of 4%. Currently, the benchmark interest rate stands at 19%, its highest level since April 2022.

Sofya Donets, an analyst at T-Bank, noted that a spending level of 40 trillion roubles would be neutral in terms of inflation. However, she estimated that an additional 1.5 trillion roubles in spending could contribute an extra 0.5% to GDP growth and increase the inflation forecast for 2025 by 0.7% to 0.8%.

The government projects inflation of 4.5% for the next year. The central bank is set to convene for its next rate-setting meeting on October 25, stating its commitment to maintaining a strict monetary policy as long as necessary to lower inflation.

Donets remarked, "The potential for a rate cut in 2025, considering the budget inputs, decreases by 100-150 basis points relative to our baseline scenario."

Natalia Orlova from Alfa-Bank indicated that the rise in government spending would elevate the expansionary fiscal impulse, measured as a change in the primary budget balance, to 2% of GDP for 2025, rather than the previously expected 1%.

"This signals sustained elevated inflationary pressure," Orlova stated.

Economists from Renaissance Capital, who had anticipated a less expansionary fiscal policy with expenditures around 39 trillion roubles, echoed concerns that the announced increase would negatively impact inflation and interest rates.

They expressed expectations of a 100 basis point hike in the key interest rate, projecting it to rise to 20%, while stating they do not foresee a return to single-digit rates in the near future.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button

Adblock Detected

Please consider supporting us by disabling your ad blocker