Russia Key Rate On Hold For Foreseeable Future

The CBR kept the 4.25% key rate and signaled this level is here to stay. The certainty of CPI falling to 3.5-4.0% in 2021 from 4.5-5.0% currently, is now lower, which means any cut before the CPI reverses (after 1Q) is unlikely, and just one 25bp cut is possible at most. A hike in 2021 is also not a base case given weak GDP and a still relatively high real rate.

Russian Central Bank Governor Elvira Nabiullina attends a press conference, Moscow, Russia
Source: Shutterstock

Key rate hold in line with expectations, dovish stance loses ground

The decision to keep the key rate on hold at 4.25% came in line with expectations, the primary reason being the acceleration of CPI to 4.6% year-on-year currently vs. the initial CBR forecast of 3.9-4.2% YoY for this year-end, which it had to raise to 4.6-4.9%.

The commentary has become less dovish, which suggests that the CBR has doubts about the further downside potential for the key rate in the medium term:

  • Quoting the CBR directly: "the Bank of Russia will assess... the existence of a potential for additional key rate reduction". 
  • The CPI forecast of 3.5-4.0% for 2021 has been retained, but the level of certainty is visibly lower, as "Disinflationary risks do not prevail in 2021 as much as before, considering the strengthening of short-term proinflationary factors and risks of their influence being more prolonged'.
  • In addition to the widely anticipated explanation of the current CPI acceleration of higher grain prices and the recent depreciation of the rouble, the CBR added a lower labor supply in some sectors, suggesting a narrowing output gap without a significant recovery in demand.
  • We see additional pro-inflationary factors such as a deteriorating foreign policy context (given the new US accusations of malicious practices and lack of progress in an official investigation of the Navalny poisoning) and the possibility of a softer than expected fiscal policy stance at the regional level given the need to maintain social support, as hinted by the president at yesterday's annual press conference. 
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