Russia Watch: CBR proceeded with a modest hike of 25bp

At the recent meeting, the CBR hiked a key rate by 25bp to 6.75%. The question of ending the tightening cycle remained open. Our baseline scenario includes no further hike(s) this year, current price dynamics make an additional 25bp hike at the October meeting also possible.

Inflation remains in the "danger zone"

Rosstat, RBI/Raiffeisen Research

According to the Central Bank of Russia (CBR) governor E. Nabiullina, as largely anticipated by the market, a choice was made between a 25bp and a bolder 50bp hike. The milder 25bp rate hike was chosen, however, the rhetoric became more hawkish, in our view, as the CBR’s governor does not rule out several additional hikes. Still, we believe that the tightening cycle is close to an end. Future CBR’s actions will be linked to inflation dynamics.

In August, the CPI once again peaked, to 6.7% yoy, according to Rosstat. The food and non-food inflation remained notably above the CBR target (7.7% and 8.0% yoy, respectively), while services stabilized below (3.8% yoy). In our view, one of the main drivers is the recently announced social stimulus — ~700 RUB bn should be spent by the budget in August-September as direct payments. Moreover, the global prices for food products and raw materials remain on the increased level (even despite stabilization in e.g. steel and wheat). We anticipate the CPI acceleration will continue in September with further leveling off in October. A disinflationary trend should start in November amid a high base effect of 2020 (the CPI rally started in November 2020). Besides, lagging impact of the monetary policy tightening and expected return to the budget rule in 2022 should support cool down on the demand side.

In our base scenario, we expected the key rate to remain at the current level this year, i.e. not be hiked further in coming months. However, the price dynamics in September and early October make an additional 25bp hike at the October meeting also likely. In our view, the tightening cycle will end when the disinflationary trend in Russia becomes more persistent, which we expect to observe already late this year.