Russia Watch: The Big Hike

At the recent meeting, the CBR proceeded with a solid 100bp hike to 6.5%. This decision was the boldest since the 2014-15 crisis period. After this frontloaded rate decision, we expect only some minor upwards adjustment later this year, as inflation should begin to moderate.

Inflation expectations are persistently increasing supporting the CBR decision

CBR, RBI/Raiffeisen Research

The main factor driving the decision is the post-coronacrisis imbalance between supply and demand: though demand has been reviving rapidly, supply remains weak as there has not been enough time for production capacities to recover from the consequences of Covid-19. In the meanwhile, inflation expectations in July continued to be met with an upward trend (to 13.4%). The data was published one day before the MPC meeting and the still bolder step was voted for. Besides monetary policy tightening, the CBR is combating heated demand via macroprudential policy measures. The CBR governor E. Nabiullina claimed that the slightly overheated customer loan market would be additionally restricted with an increase in risk coefficients to the levels, exceeding pre-pandemic ones (new loans will consume more regulatory capital for the banks). In our view, these measures combined with the fiscal policy normalization trend could put downward pressure on the CPI from autumn onwards.

The bold key rate hike was supported with a mid-term forecast update: The CPI for 2021YE was increased by 1pp (to 5.7-6.2%), while the updated range for the key rate implies additional intrayear hikes up to 100bp. E. Nabiullina stated that in a certain positive scenario, July hike could be even the last one in 2021, however, in our view, some fine-tuning hikes could be possible.

We put our forecast under revision due to the unexpectedly bold CBR decision and notable base case scenario update.