Kremlin says central bank is on top of inflation but government is watching closely

• VAT rose from 20% to 22% in January 2026 to boost state budget revenues and compensate for increased military spending and falling oil and gas revenues
• Consumer prices rose 5.59% in 2025 (down from 9.52% in 2024), but the VAT increase has caused faster-than-expected inflation in early January 2026
• The central bank's key interest rate stands at 21%, and analysts predict it may refrain from cutting rates at its February 13 meeting due to accelerated price growth

Summary

Key Development: Russia's Kremlin expressed confidence in the central bank's ability to manage rising inflation, despite implementing a significant value-added tax (VAT) increase at the start of 2026.

Critical Facts:

• VAT rose by 2 percentage points to 22% in January 2026, aimed at boosting state revenues to offset increased military spending and declining oil and gas revenues
• The central bank's key interest rate stands at 21% (maintained at elevated levels for years)
• Consumer price inflation reached 5.59% in 2025, down from 9.52% in 2024
• The central bank forecasts inflation at 4-5%, with a long-term target of 4%

Official Position: Kremlin spokesman Dmitry Peskov stated no current concerns about inflation exceeding forecast ranges, emphasizing the central bank is "monitoring the situation and taking the measures it deems necessary to maintain macroeconomic stability." However, the government is watching closely and will hold discussions "as necessary."

Market Implications:

• Economists report the VAT increase triggered faster-than-expected price growth in early January
• Household inflation expectations remain elevated despite improved 2025 figures
• Analysts predict the central bank may hold rates steady at its February 13 meeting rather than implementing cuts
• High interest rates continue to squeeze consumers and draw business complaints

Sector Impact: The policy primarily affects Russian fiscal stability, monetary policy, and consumer spending power, with broader implications for businesses operating under restrictive credit conditions.