Analysts raise Russia's 2025 inflation estimate after tax hike

By Elena Fabrichnaya and Gleb Bryanski

Analysts raised their Russian inflation estimates for 2025 and 2026 after the government announced plans to raise taxes and the central bank raised its own inflation estimates in response, a Reuters poll of 15 analysts shows on Friday.

The analysts now see full-year inflation for 2025 at 6.9%, compared with 6.5% in the previous poll. The figure is in line with the central bank's own forecast of between 6.5% and 7%. Analysts see inflation in 2026 at 5.4%, above the official forecast of between 4% and 5%.

The Finance Ministry proposed raising the rate of value-added tax to 22% from 20% in 2026 to fund military spending and help curb a swelling budget deficit. Next year's draft budget is currently being reviewed in parliament.

The tax hike, expected to be passed on to consumers through rising prices, will fuel inflation, although the central bank said it will have a one-off effect at the start of the year, when changes take place.

"Accelerated price growth is expected ahead of the VAT increase, which means that the central bank's inflation forecast of 6.5-7.0% by the end of the year still looks quite ambitious," said Natalia Orlova from Alfa Bank.

INFLATION DANGERS

Inflation reached 9.5% in 2024, posing the biggest danger to Russia's overheated economy. The central bank hiked its key interest rate to 21%, the highest level since the early 2000s in response.

As a result, Russia's economic growth slowed to around 1% from 4.3% last year. The rouble rallied by over 45% against the dollar at the start of this year as high interest rates made rouble-denominated assets attractive.

The economists surveyed maintained their economic growth forecast for 2025 at 1% despite some acceleration of growth in September and a 50-basis-point rate cut in October, which many saw as symbolic and not sufficient to spur economic growth.

"Despite the acceleration of GDP growth in September, the risks of the economy cooling down have not been eliminated. The economy is already steadily growing at rates below its potential and the global average," said Denis Popov from PSB bank.

Analysts saw the rouble at 94.2 to the dollar in 12 months, stronger than 97.7 in the previous poll, and 8.7% weaker than its current level of 80.90 to the dollar. In the short term, the rouble is expected to stay strong.

"In the baseline scenario with unchanged geopolitics, we believe that the rouble will remain strong in November," said Mikhail Vasilyev from Sovkombank, predicting that high interest rates and low demand for foreign currency will support the rouble.