CBR: a hike and clear signal for aggressive tightening - Capital Economics
Emerging Europe Economics

CBR: a hike and clear signal for aggressive tightening

Emerging Europe Economics Update
Written by Liam Peach
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Russia’s central bank (CBR) unexpectedly hiked its key policy rate by 25bp to 4.50% at today’s meeting in response to the recent surge in inflation and the accompanying communications sent a strong signal that it is prepared for an aggressive tightening cycle. We think that there will a 25bp rate hike in April and June, with additional tightening later this year taking the policy rate to 5.25% by year-end.

  • Russia’s central bank (CBR) unexpectedly hiked its key policy rate by 25bp to 4.50% at today’s meeting in response to the recent surge in inflation and the accompanying communications sent a strong signal that it is prepared for an aggressive tightening cycle. We think that there will a 25bp rate hike in April and June, with additional tightening later this year taking the policy rate to 5.25% by year-end.
  • A series of stronger-than-expected inflation readings in recent months had shifted the debate to how quickly the CBR will normalise policy. The majority of analysts had expected the central bank to hold firm and we thought that the CBR would deliver a clear hawkish message by laying the groundwork for the tightening cycle to begin in April. In the event, the central bank went much further than anybody was expecting in delivering its guidance for significant monetary tightening to bring inflation down.
  • Inflation accelerated above the central bank’s 4% target to 5.7% y/y in February and the CBR emphasised in the press statement that the balance of forces has now become pro-inflationary. The strength of inflation last year was driven by the slump in the ruble, but price pressures are now much broader and persistent in nature, stemming from a strong recovery in demand and ongoing supply constraints due to the pandemic.
  • The central bank’s latest guidance is that “inflation will return to the 4% target in the first half of 2022 and will remain at that level further on”. This is in line with our forecast (see Chart 1) and a major change from its meeting in February, when its latest forecasts showed inflation falling to 3.7-4.2% by the end of this year. Against this backdrop, the central bank called for a return of interest rates to the 5-6% neutral range and gave a clear signal that it would hike interest rates further at its upcoming meetings.
  • The CBR’s hawkish message was reinforced by comments from Governor Elvira Nabiullina in the press conference. Ms Nabiullina argued that it was necessary to prevent a further acceleration of inflation from feeding through into higher inflation expectations by tightening monetary policy decisively.
  • Governor Nabiullina stood firmly on the side on an aggressive tightening cycle. Expectations for tightening over the next year or so were bullish before the meeting, with FRAs pricing in 150bp of interest rate hikes by the end of 2021. Analysts’ forecasts were lower, with 50bp pencilled in. When discussing this difference in the path of interest rates, Governor Nabiullina argued that if the central bank waits too long before hiking interest rates, it will need to raise rates much more in the future to return inflation to target.
  • The central bank will publish its new inflation forecasts at its meeting in April and, with that, its projections for the path of interest rates over the next few years. The CBR’s determination to rein in inflation and a possible increase in the threat of tighter sanctions later this year, argues strongly in favour of additional tightening. We expect a 25bp rate hike at each of the meetings in April and June, and a further 25bp in the second half of the year, taking the policy rate to 5.25% by year-end. (See Chart 2.)

Chart 1: Russia Consumer Prices (% y/y)

Chart 2: Russia Key Policy Rate (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Bloomberg, Capital Economics


Liam Peach, Emerging Europe Economist, liam.peach@capitaleconomics.com