Russia Key Rate Preview: CPI Pressure Leaves No More Room For Cuts

With CPI spiking 5.2% YoY in January and near-term context still pro-inflationary, further cuts in the 4.25% key rate are now unlikely. But as long as year-end CPI expectations are within the current 3.5-4.0%, and CPI risks in the EM space are under control, the Russian real rate is high enough for the central bank to avoid a key rate increase in 2021.

The Central Bank of Russia headquarters in Moscow

1Q21 CPI to reach 5.3-5.5% YoY before returning to 3.5-4.0% by the year-end

Acceleration in the Russian CPI from 4.9% year-on-year in December 2020 to 5.2% YoY in January is slightly better than the market consensus of 5.3% YoY and our expectations of 5.3-5.5% YoY, but still this result is likely to call for more caution in the upcoming key rate decision by the Central Bank of Russia on 12 February.  

  • The overall CPI trajectory trails the upper range of expectations announced by the CBR at its December meeting.
  • The households' inflationary expectations remain at elevated levels despite recent moderation in January (Figure 1).
  • True, most of the factors contributing to the current pick-up in CPI are temporary, including the statistical base effect and externally-driven increased price pressure in the food segment (Figure 2), amplified by the previous ruble depreciation. However, it appears, that the agro inflation, contrary to our inital expectations, remains strong (Figure 3) and is going to continue pushing up food CPI in 1Q21 (Figure 4). The efficiency of the price shock absorption tools enforced by the government is yet to be seen, while the current local price growth in grains is already having secondary effects on other items such as meat, eggs, and dairy, by CBR's own admission.
  • Continued acceleration in price growth for most of the non-food and services confirms our earlier concerns regarding lack of demand-driven disinflation we voiced earlier. 

As a result, we see CPI peaking at 5.3-5.5% in 1Q21 and staying above the 4.0% target for the most part of the year, with the possibility of inflation falling into the 3.5-4.0% range only in December. This should be the primary reason for the CBR to remove the option of further key rate cuts from its forward-looking guidance. We no longer see the 25bp downside to the key rate this year.

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