Russia Watch: Strong front-loaded hike — end of dovish policy in CBR forecast

The Central Bank of Russia (CBR) proceeded with a key rate hike for the second meeting in a row. This time the decision was more proactive (+50bp), which resulted in the key rate reaching a neutral range seen between 5% and 6% already, although previously the CBR had stated that in 2021 the monetary policy would remain soft “on average”. Nevertheless, the CBR’s governor E. Nabiullina claims that current CPI level exceeds the base case scenario, which requires a prompt response from the regulator. The CPI reached 5.8% yoy in March, which, in our view, should be a bifurcation point in the yoy trend. The spikes in food prices and core components of CPI acceleration were the main drivers. The move of monetary policy towards a neutral stance will put downward pressure on the CPI figure but the impact will only become visible wit a lag. Consequently, in the updated official inflation forecast for 2021, the CBR expects the CPI to reach 4.7–5.2% but leveling off is expected in H2 2021. Apart from inflationary risks, demand strengthening is again listed as a factor for the hike. Demand outperforms the supply side in terms of recovery, driving CPI upwards. High demand allows producers to compensate their costs via prices increase.

In our view, sanction risks are also a matter of concern for the CBR. Despite the mildness of the recently announced sanction package (the key measure is banning US financial institutions from buying OFZs only on the primary market) and recent easing of tensions in the confrontation with Ukraine, the US sanction rhetoric leaves still space for further tightening. Thus, uncertainty on the geopolitical area should persist as a relevant variable for the CBR in the upcoming months.

At this meeting, the expected range of average key rate was added to the CBR’s forecast for the first time, information for which the entire analyst community was waiting. For 2021, the lower bound of the range was set to 4.8%, which relates to keeping the rate at 5% until the YE, the upper bound for 2021 was set to 5.4% which would imply further monetary police steps towards the tight zone. Our current forecast of 5% for this year lies on the lower bound of the CBR's forecast. In order to take into account the newly published key rate trajectory, we put our current key rate forecast for year-end 2021 up for revision. Nevertheless, from now on, the time of dovishness for monetary policy has officially ended for the foreseeable future.