Economic activity, inflationary pressure rose in Jan-Feb By Reuters

MOSCOW (Reuters) – Russian economic activity rose in January-February but inflationary pressure also increased, the central bank said on Tuesday, adding that this could warrant a tighter monetary policy.

The bank, whose next rate-setting meeting is scheduled for March 17, also said Russia’s decision to cut oil output would likely narrow its trade surplus, a risk factor for the rouble, and that this could have an adverse impact on Russia’s gross domestic product (GDP) in the second quarter and beyond.

The Bank of Russia has become more hawkish this year. It held its key rate at 7.5% last month but said a further widening of the country’s budget deficit might compel it to raise the cost of borrowing.

“Domestic demand is growing on the back of increased budget spending,” the bank said in a report on Tuesday.

Russia’s finance ministry said on Monday the federal budget deficit had widened to around $34 billion in the first two months of this year as Moscow sharply raised expenditure while revenue fell amid slumping oil and gas takings.

The central bank said Russia’s GDP dynamics in 2023 could be better than its baseline forecast of 1% contraction to 1% growth, provided that there were no new, significant challenges.

Russia’s economy has proven unexpectedly resilient in the face of Western sanctions imposed last year over the Ukraine crisis, but a return to pre-conflict levels of prosperity may be far off as more government spending is directed towards the military and price caps squeeze crucial energy export earnings.