- The Central Bank of Russia stayed on hold at 4.25%, but continues to tighten the wording of the release
- The recent spike in inflation comes as confirmation of supply side constraints
- Release does not offer a clear picture of upcoming CBR action
CBR stayed on hold at 4.25%, but continues to tighten the wording of the release: The CBR kept its key policy rate unchanged at 4.25% today in line with the market consensus. Given the recent spike in annual inflation to 4.7% y/y as of 14 December, the wording of the release continued to tighten. The CBR now says it will assess the existence of a potential for a key rate reduction while in the past it was considering the necessity for a further key rate reduction.
The recent spike in inflation comes as confirmation of supply side constraints: The good news about the CBR communiqué is that in the previous release the regulator for the first time expressed concerns over the supply side constraints which could create inflationary risks: this projection has fully materialised during the previous months and inflationary risks are now in focus. The main reason is the sharp acceleration in food prices, mainly related to the sharp spike in sugar prices (up by 70% y/y due to the decline of sugar beet production this year by 30-40% y/y) and wheat prices. Annual food price inflation has thus jumped to 5.8% y/y. On top of the food prices asset price inflation is also on the rise: there is an overheating of the real estate market as the strong 20% y/y increase in mortgage lending this year has coincided with the 1% y/y decline in residential construction across the country, including an 11% y/y decline in residential construction in the city of Moscow (data for 10M20). Not surprising, the population’s inflationary expectations are on the rise and causing the CBR to be more cautious with regards to the rate cut.
Release does not offer a clear picture of upcoming CBR action: The bad news is that in an environment of growing uncertainty, the CBR release does not help to clarify the monetary authority’s further action. The tighter wording of the release suggests that a pause could last for a long time; however, the CBR inflation forecast for 2021 remains disinflationary biased at 3.5-4.0%, suggesting that the CBR was not proactive in the past to assure a symmetric inflation range around 4.0% level. This conflicting guidance implies that a wide range of action could be expected for 2021, from more rate cuts (if we follow the CBR inflation forecast) to some rate hike (if the error in the inflation forecast is similar to this year when instead of October’s inflation range of 3.9-4.2% y/y the CBR now projects 4.6- 4.9% y/y for 2020).
We see the current spike in inflation as bringing more, not less disinflationary risks for 2021: As opposed to the CBR, we believe that the recent spike in inflationary concerns is a strong reason for disinflationary concerns for 2021. In fact, this year state authorities were focused on supporting demand while omitting the supply side; however, given that even President Putin is now involved in solving the inflation problem and has ordered to put ceiling on sugar prices, we are sure that in 2021 the focus will shift to the supply side. This change will ensure more pronounced disinflationary risks and we have recently cut our 2021 inflation forecast to 3.2% y/y.
Policy rate expected to be on hold on 12 February and through 1Q21: That said, the 2021 disinflationary risks will likely materialize in 2H21, while in 1Q21 annual inflation will continue to accelerate to 5.0-5.5% y/y. We thus expect the CBR to keep its cautious wording and to pause in 1Q21; the option for a rate cut will reopen only from 2Q21.
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