Macro Analysis /

Russia Macro Insights: The CBR is not afraid to keep tightening

  • The CBR hiked the key rate to 8.5% in line with the consensus, but the communique was more hawkish than we expected

  • Inflation data favourable in recent weeks, however not enough to make the CBR more dovish

  • More cautious 2022 ruble outlook

Natalia Orlova
Natalia Orlova

Chief Economist

17 December 2021
Published byAlfa

The CBR hiked the key rate to 8.5% in line with the consensus, but the communique was more hawkish than we expected: The CBR raised the key policy rate by 100bp to 8.5% in line with expectations and the consensus of analysts. However, the rhetoric was more hawkish than we had expected. On one hand, the CBR reiterated its goal to curb inflation to 4.0-4.5% by the end of 2022, a target which is extremely optimistic. On the other hand, in the text of the release, the CBR indicated that inflationary risks are on the rise as (1) the labor market is bringing stronger inflationary concerns with the unemployment rate back to a historical low and (2) the normalization of global central banks’ policies could bring more pressure to EM currencies. All in all, the combination of ambitious inflation goals for 2022 and the stronger inflationary risks implies that the CBR is ready to hike rates up further in the coming months.

Inflation data favourable in recent weeks, however not enough to make the CBR more dovish: It is worth mentioning that the CBR’s hawkish stance persists despite recent inflationary data that could be seen as favorable. First, while the annual inflation rate jumped to 8.4% y/y in November, in both the food and non-food segments price growth reached 10.8% and 8.3% y/y, respectively, close to the October levels (10.9% y/y and 8.2% y/y). Second, as of 13 December the MTD inflation was reported at 0.12% which came better than expected. The fact that the CBR has disregarded this improvement suggests that its focus has been shifted to the gap between the actual level of inflation and the target, and that its actions will be more focused to take into account risks which emerged since the last CBR meeting in October.

More cautious 2022 ruble outlook: One area where the situation has deteriorated since the October policy rate meeting and which could generate inflation risks, is the performance of the ruble exchange rate. The increased geopolitical tensions and a planned tightening of monetary policy in advanced countries are two serious reasons to be skeptical about any positive pass-through effect on the 2022 horizon. The CBR release clearly reflects concerns about growing forex volatility next year.

New wave of food inflation could be seen in 2022: Another point of concern is the growth in global food prices. The increase in gas prices is projected to have a negative effect on fertilizers, where price increases are expected to be translated into higher food prices on the 2022 horizon. This echoes a recent comment from Russia’s First Deputy PM Belousov about a new wave of food inflation expected in 2H22, a factor which the CBR must take into its consideration in its rate decisions.

Households inflationary expectations jumped to 14.8% in December: The final negative shift is that the inflationary expectations of Russian households which were already at five-year highs of 13.5-13.6% in October-November, have jumped to 14.8% in December. This high figure reflects that household behavior is still little focused on rebuilding savings. This comes hand in hand with the CBR’s point that banking market conditions are still neutral, i.e. Russian banks did not fully transmit the key rate hike YTD increase to their clients on both deposits and especially on the lending side.

More rate hikes expected in 1Q22: The extremely ambitious plan to reduce inflation from 8.1% y/y (as of December 13) to 4.0-4.5% by the end of 2022 requires more rate hikes in 1Q22. We see the CBR ready to act at both 11 February and 18 March policy rate meetings. In terms of the scale of the move, they will largely depend on inflation statistics, however in our base case we would assume a 50-75 bp rate increase in February followed by a more modest 25 bp rate increase in March. Such a trajectory could open a door to a long pause at a 9.0-9.5% level.