Russia increases the interest rate by one point and sees possible a rise in GDP of up to 2.5%

The Central Bank of Russia (BCR) today increased the interest rate by one percentage point to 8.5%, which reaches its highest level since June 2022, and significantly revised upwards its growth forecasts for the economy for this year, now predicting an advance of the GDP between 1.5 and 2.5%.

In its April macroeconomic projections, the Russian monetary entity predicted a GDP increase of between 0.5% and 2%, even in the context of Western sanctions for the Russian war in Ukraine.

The Russian government estimates that the economy could grow by more than 2%, but has not yet revised its calculations, Prime Minister Mikhail Mishustin said earlier this month.

After its regular meeting of the Board of Directors of the BCR, the institution directed by Elvira Nabiúlina, affirmed that “the economy in general has completed its recovery phase” after the first shock of Western sanctions last year.

Russia closed 2022 with a contraction of 2.1%, although better than expected. In the first quarter of 2023, GDP fell by 1.8% compared to the same period of the previous year.

The BCR believes that “in the future, the growth rates of the economy will gradually converge towards rates consistent with a balanced growth path”.

The Bank of Russia places the growth of the Russian economy in 2024 in a range of 0.5% to 2.5%; by 2025 from 1% to 2%; and by 2026 from 1.5% to 2.5%.

He stresses that different trends are observed in all industries, so that in most of the economic sectors that specialize in meeting domestic demand, production has reached or exceeded pre-crisis levels.

By contrast, the expansion of production in export-oriented industries is currently “significantly constrained by foreign trade and financial restrictions”indicates.

The BCR points out that internal demand partially replaces external demand supported by the contribution of fiscal policy and growing public investment.

“The increase in domestic demand exceeds the capacity to expand production, even due to the limited availability of labor resources”however warns the Bank.

For this reason, Russia registers an increase in imports in the midst of falling exports, and in the midst of this trend the depreciation of the ruble is framed since the beginning of 2023.

This is the highest rate since June 2022, when it was 9.5%.

The BCR explained that the growth rates of prices, including several underlying ones, have exceeded 4% in annual terms and continue to increase.

“Domestic demand trends and ruble depreciation (…) significantly amplify pro-inflationary risks,” emphasizes the monetary entity.

The institution calculates that annual inflation will be between 5% and 6.5% this year.

The Bank of Russia keeps open the prospect of a further rate hike at its next meetings to stabilize inflation near 4% in 2024 and beyond, he stressed.

Source: EFE