Russian central bank ups 2023 GDP forecast as it hikes rates by 100 basis points

(Reuters) – Russia’s central bank raised its forecast for economic growth in 2023 even as it hiked rates by 100 basis points on Friday, now envisaging gross domestic product (GDP) growth of up to 2.5% this year.

The bank raised its key interest rate by a steeper-than-expected 100 basis points to 8.5%, raising the cost of borrowing as the weakness of the rouble added to inflation risks from a tight labour market and strong consumer demand.

Higher rates increase borrowing costs and can slow economic growth, but the bank said it now saw the economy growing 1.5-2.5% this year, up from a previous forecast of 0.5-2.0%.

Soaring defence spending has kept Russia’s industrial sector ticking over, but economists in Russia and abroad generally agree that its long-term economic prospects are limited, being heavily restrained by Western economic sanctions imposed in response to Moscow’s military campaign in Ukraine.

The bank’s hawkish rate move and rhetoric – it said it held open the possibility of future hikes – was reflected in its key rate range forecast for 2023, which it lifted to 7.9-8.3% from 7.3-8.2% previously.

The bank also raised its year-end inflation forecast to 5.0-6.5% from 4.5-6.5%, and revised downward its forecast for Russia’s 2023 current account surplus, to $26 billion from $47 billion.

The bank still expects Russia’s flagship Urals oil blend to average $55 per barrel in 2023.