Russia budget spending hike to 2025 delays key rate cuts Reuters

MOSCOW (Reuters) – Russia’s increased budget spending next year risks fueling inflation and could force the central bank to maintain tight monetary policy, with the benchmark interest rate at double digits more than expected, analysts said on Thursday.

Russia announced key figures for its 2025 budget, increasing spending by 9% to 41.5 trillion rubles ($446.2 billion), running a deficit of 0.5% of GDP and focusing on needs military amid what Moscow calls a “special military operation” in Ukraine.

The new spending figures come as inflation hovers around 9%, well above the central bank’s stated target of 4%, with the benchmark interest rate at 19%, the highest since April 2022.

T-Bank analyst Sofya Donets said a spending level of 40 trillion rubles would be inflation-neutral. It estimated that 1.5 trillion rubles of additional spending would add 0.5 percent to the GDP growth forecast and 0.7-0.8 percent to the inflation forecast in 2025.

The government sees inflation at 4.5% next year. The central bank will hold its next rate-setting board meeting on October 25, saying it will maintain tight monetary policy as long as needed to curb inflation.

“The potential for a rate cut in 2025, given budget contributions, falls by 100-150 basis points from our baseline scenario,” Donets said.

Alfa-Bank’s Natalia Orlova said that with the increase in spending, the size of the expansionary fiscal stimulus measured as the change in the primary budget balance will rise to 2% of GDP in 2025 instead of the expected 1% of GDP.

“This is a signal of sustained inflationary pressure,” Orlova said.

Renaissance Capital economists, who saw a less expansionary fiscal policy with spending at 39 trillion rubles, also said the announced increase was negative for inflation and interest rates.

“The draft budget figures for 2025 confirm our expectation of a 100bps hike in the key rate to 20%,” they said, adding that they did not expect the benchmark rate to return to single digits anytime soon.