© Reuters. FILE PHOTO: A view shows the headquarters of the Central Bank of Russia in Moscow, Russia, February 22, 2018. REUTERS/Sergei Karpukhin
By Alexander Marrow and Elena Fabrichnaya
MOSCOW (Reuters) – The Bank of Russia will find no room to cut interest rates in 2023 as rising budget spending has raised inflation risks, a Reuters poll showed on Wednesday, dooming the Russian economy. country into a second year of contraction.
Russia’s economy proved resilient in the face of harsh Western sanctions imposed after Moscow sent tens of thousands of troops to Ukraine just over a year ago, but a return to pre-conflict levels of prosperity may be some way off as the largest public spending goes to the military.
Analysts expect the economic downturn to continue, forecasting a 1.9% drop in gross domestic product (GDP) this year, an improvement from the 2% drop forecast in the previous survey, and after an estimated drop in 2.1% in 2022.
External forecasts for Russia’s economic development vary. The International Monetary Fund’s expectation of 0.3% growth is at odds with analysts at Moody’s (NYSE:) Investors Service who expect a 3% contraction, anticipating that sanctions pressure will intensify and Russia will lose budget flexibility. as spending increases.
The average of 14 analysts and economists surveyed in late February suggested the Bank of Russia will keep the key rate at 7.5% at its March 17 board meeting as it seeks to return inflation to its March 4 target. %.
The bank gave an aggressive signal last month, warning that any further increase in Russia’s budget deficit could force it to raise the cost of borrowing. Analysts have gradually raised their forecasts for where the key rate will end up this year, to 7.5% from 7.13% in the previous survey.
“High budget spending is the key issue,” said Anton Tabakh, chief economist at RA Expert, who expected the spike in inflation earlier in the year to be contained due to higher budget spending.
“But at the same time, there will be a precautionary rate hike, and as a result, we see the key rate at 7.5% in December, from 8% to 8.25% by mid-year.”
Tabakh also said that all the risks were higher and the level of uncertainty high.
“Black swans come regularly, maybe little black swans, black sparrows, but they do 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 the survey forecasts suggested that the ruble will trade at 75.00 against the dollar within a year, compared with the rate of 73.00 forecast by analysts in late January. The official rate on Wednesday was 74.89 rubles to the dollar.
Annual inflation is expected to end this year at 5.8%, the same as in the previous survey, and well below last year’s double-digit increase.
Most of the forecasts in the Reuters poll were based on at least 10 individual projections.
(Reporting and surveys by Alexander Marrow and Elena Fabrichnaya; Editing by Barbara Lewis)