Russia Watch: Not the last (bold) tightening step, markets reprice rate path
The Central Bank of Russia (CBR) proceeded with a 50bp hike at last Friday's policy meeting. This notably bold step is aimed at calming demand and combatting elevated inflation (CPI 6% yoy in May). The CBR is set to continue its tightening course already at the July meeting.
Inflation is accelerating (headline CPI based on weekly data, % yoy)
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| Rosstat, RBI/Raiffeisen Research |
The CBR is rapidly tightening monetary policy with this second and consecutive 50bp hike in its key rate to 5.5%, resulting in overall 125bp since the beginning of the year. This is the first time in modern Russian history when the reasoning behind hikes is strong demand pushing prices up and not mere anti-crisis firefighting. The demand is being backed by fiscal stimulus and the accelerating pace of consumer lending. Along with only modest revival on the supply side this pushes prices up. The CPI is becoming persistently high — 6.1% yoy based on the first week of June (6% yoy in May). Other factors relevant for monetary policy remain in the neutral-positive zone: (1) a certain stabilisation in the geopolitical agenda (Russia 5Y CDS returned to ~85 — the level of February, before new US sanctions agenda started to unfold), (2) no active capital outflow from emerging markets (10Y bond yields are relatively stable), (3) the rouble is appreciating (currently — below 72 USD/RUB).
Apart from monetary policy tightening, the fiscal policy should also return to the budget rule in 2022 (to the neutral state) and consumer lending is expected to cool down due to an increase of macro-prudential add-ons for banks (more regulatory capital is needed for the same loan).
Despite a lack of any significant impact on the 10Y-OFZ markets (long-term key rate expectations are stable), the mid-term expectations are evolving under new inflation data. Market participants are repricing year-end 2021 key rate expectations — from 5.75-6% 3 weeks ago to 6.25-6.5% currently. The CBR governor E. Nabiullina said the regulator will update the official forecast for the average key rate. Based on the CPI trajectory deviation from the base case scenario, we have also put our forecast under revision. The CBR should proceed with the tightening already at the upcoming meeting if the pandemic situation does not deteriorate materially.
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Inflation increased further in May, surprising to the upside in many markets including the US (for CEE, Czechia being a notable exception), and inflation will likely stay elevated in upcoming months, though we should be close to/at the peak in several markets. Monetary policy is reacting with the Russian Central Bank hiking today by further 50bp and the Ukrainian National Bank being under pressure to tighten further at its meeting next week (we, though, believe that the hike will be postponed). The ECB confirmed its prevailing course this week, while the FOMC meeting next week will be watched for news on tapering. The (geo)political highlight next week is the meeting between Presidents Biden and Putin on Wednesday. In the euro area, only the industrial production result will be the relevant data point next week. In CEE, Romanian and Russian output and Polish wage data are to be released next week. |