UPDATE 1-Russian officials warn of overheating economy and inflationary spiral | Reuters

Russia’s recovering economy is at risk of overheating, and state spending may spur already high annual inflation of 5.9%, officials said on Thursday.

Inflation in Russia has been on the rise since early 2020, boosted by a weaker rouble and globally higher food prices.

It accelerated again in May and is on track to speed up further in the coming months, central bank analysts said in a report on Wednesday. The central bank’s target is 4% target.

“If we continue with increased spending, what will we get? Overheating. Elements of overheating are already visible - high inflation,” Finance Minister Anton Siluanov said at the St Petersburg International Economic Forum (SPIEF).

Russia needed to return to normal fiscal and monetary policies, Siluanov said, after authorities slashed rates to a record low 4.25% last year and stepped up budget spending to address the COVID-19 crisis.

Central Bank Governor Elvira Nabiullina on Thursday said inflation expectations were at a four-year high and had been elevated for several months already, saying that supply shortages and people changing their purchasing behaviour over fears of price rises could exacerbate the problem.

“This is essentially how the inflationary spiral unfolds and we, of course, cannot allow that to happen,” she said.

Nabiullina said that if the central bank had not already started a return to neutral monetary policy, the lag would have required even higher and faster rate hikes later.

High inflation has prompted the central bank to raise rates twice this year, last to 5% in April, making lending more expensive. It is widely expected to hike the key rate to 5.25% next week, a Reuters poll of analysts showed.

“In our view, this (return to neutral policy) does not hinder economic growth, we see that demand has almost recovered. So there is no need to additionally stimulate demand at the moment,” Nabiullina added. (Reporting by Darya Korsunskaya; Writing by Alexander Marrow; Editing by Andrew Cawthorne and Angus MacSwan)

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