Higher inflation risks to give Russia no room to cut rates this year: Reuters poll

By Alexander Marrow and Elena Fabrichnaya

MOSCOW (Reuters) – The Bank of Russia will not find room to cut interest rates in 2023 as increased budget spending has raised inflation risks, a Reuters poll showed on Wednesday, consigning the country’s economy to a second year of contraction.

Russia’s economy proved resilient in the face of tough Western sanctions imposed after Moscow sent tens of thousands of troops into Ukraine a little over a year ago, but a return to pre-conflict levels of prosperity may be far off as more government spending is directed towards the military.

Analysts expect the economic downturn to continue, predicting a drop in gross domestic product (GDP) of 1.9% this year, an improvement on the 2% drop forecast in the previous poll, and following an estimated 2.1% slide in 2022.

External forecasts for Russia’s economic development vary. The International Monetary Fund’s expectation for 0.3% growth is at odds with analysts from Moody’s Investors Service who expect a 3% contraction, anticipating sanctions pressure will intensify and Russia lose budget flexibility as spending climbs.

The average of 14 analysts and economists polled in late February suggested the Bank of Russia will hold the key rate at 7.5% at the March 17 board meeting, as it seeks to bring inflation back to its 4% target.

The bank gave a hawkish signal last month, warning that any further widening of Russia’s budget deficit might compel it to hike the cost of borrowing. Analysts have gradually raised their forecasts for where the key rate will end this year, to 7.5% from 7.13% in the previous poll.

“High budget spending is the key issue,” said Anton Tabakh, Chief Economist at RA Expert, who expected the upsurge in inflation at the beginning of the year due to higher budget spending to be contained.

“But at the same time, there will be a preventative rate increase and, accordingly, we see the key rate at 7.5% in December, from 8%-8.25% in the middle of the year.”

Tabakh also said that all risks were higher and the level of uncertainty elevated.

“Black swans come regularly, maybe small black swans, black sparrows, but they come.”

Inflation expectations, an indicator to which the central bank pays close attention ahead of meetings, rose to 12.2% in February.

The average of forecasts in the poll suggested the rouble will trade at 75.00 against the dollar a year from now, compared with a rate of 73.00 predicted by analysts in late January. Wednesday’s official rate was 74.89 roubles per dollar.

Annual inflation is expected to finish this year at 5.8%, the same as in the previous poll, and well down from last year’s double-digit rise.

Most of the forecasts in the Reuters poll were based on at least 10 individual projections.

(Reporting and polling by Alexander Marrow and Elena Fabrichnaya; Editing by Barbara Lewis)