The federal budget for 2025-2027 submitted by the government to the State Duma could contribute to higher than expected inflation, the analysts at Renaissance Capital argued on October 1.
As followed by bne IntelliNews, the 2025 budget boosts military spending by 25%, with the Central Bank of Russia (CBR) warning of fiscal risks to inflation.
In addition, the planned indexation of housing and utility tariffs in 2025 by 12% is much higher than the previously planned 6%.
“Purely technically, this will add an additional 0.5 percentage points to inflation next year. We are also concerned that this makes it doubtful that the practice of indexing tariffs by an amount close to the inflation target (4%) will be maintained in the future,” RenCap analysts warn.
The growth in consolidated budget spending (federal and regional budgets) is at RUB7 trillion to RUB80 trillion in 2025, which is higher than RenCap’s estimate of the inflation-neutral spending level (RUB77 trillion).
“Taking into account the new budget parameters and the indexation of utility tariffs, we see inflation at around 5.4% in 2025 (current forecast: 4.7%); we still expect the key interest rate to rise by 100 basis points to 20% in October and note the risk of a further rate hike in December,” the analysts argue.
RenCap analysts see less room for rate cuts in 2025 in the baseline scenario, tentatively to 14.5%-15% key interest rate.
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