VAT increase will hinder return to inflation target in 2026, but alternative scenario would require tightening monetary policy - Central Bank of Russia analysts

MOSCOW. Oct 14 (Interfax) - The increase in the VAT rate will complicate the path to the inflation target level in 2026, but an alternative method of maintaining budget expenditures would require the Central Bank of Russia to tighten monetary policy, CBR analysts said.

The government has proposed raising the basic VAT rate from January 1 by 2 percentage points (p.p.), from 20% to 22%. The planned increase will add 0.6-0.8 p.p. to prices in December 2025 - January 2026, the CBR analysts said. Their opinion is cited in the "What the Trends Say" bulletin published on Tuesday.

"Based on the experience of the VAT increase in 2019 [by the same 2 p.p., from 18% to 20%], as well as the experience of other countries, it will not be fully passed through to 'on-the-shelf' prices. Part of the additional VAT will be absorbed by the margins of producers and trade. Nevertheless, this somewhat complicates the task of achieving 4% inflation in 2026, taking into account the lags with which monetary policy operates, and the direction of the collected additional revenues to finance expenditures," the bulletin said.

But if the same level of budget expenditures were financed through a budget deficit rather than through VAT and other tax measures, then additional tightening of monetary policy would be required to return to low inflation, it said.