Russia's increased budget spending next year risks fuelling inflation and may force the central bank to maintain tight monetary policy with the benchmark interest rate in double digits longer than expected, analysts said on Thursday.
Russia has announced key figures for the 2025 budget, raising its spending by 9% to 41.5 trillion roubles ($446.2 billion), with a deficit of 0.5% of GDP and a focus on military needs amid what Moscow calls its "special military operation" in Ukraine.
The new spending figures come as inflation is running at about 9%, well above the central bank's declared 4% target, with the benchmark interest rate at 19%, the highest since April 2022.
T-Bank analyst Sofya Donets said a spending level of 40 trillion roubles would be inflation-neutral. She estimated that 1.5 trillion roubles of excess spending would add 0.5% to the GDP growth forecast and 0.7-0.8% 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 Oct. 25, saying that it will maintain a tight monetary policy for as long as needed to bring inflation down.
"The potential for a rate cut in 2025, considering the budget inputs, decreases by 100-150 basis points relative to our baseline scenario," Donets said.
Alfa-Bank's Natalia Orlova said that with the increase in expenditures, the size of the expansionary fiscal impulse measured as a change in the primary budget balance would increase to 2% of GDP in 2025 instead of the expected 1% of GDP.
"This is a signal of sustained elevated inflationary pressure," Orlova said.
Renaissance Capital economists, who saw a less expansionary fiscal policy with expenditures at the level of 39 trillion roubles, also said the announced increase was negative for inflation and interest rates.
"The figures of the 2025 budget draft confirm our expectations of a 100 bps hike in the key rate to 20%," they said, adding that they did not expect the benchmark rate to return to single digits any time soon.
