CBR Maintains Hawkish Stance by Lifting the Rate to 13%
Bottom Line: Central Bank of Russia (CBR) announced on September 15 that it decided to hike the key rate by 100 bps to 13% citing inflationary pressures remaining high, strong demand, and depreciation of ruble during summer months. (Note: In the last two MPC meetings, CBR first raised the key rate by 100 bps to 9.5% on July 21 and 350 bps to 12% on August 15). Considering that CBR is actively aiming to cool off inflation via key rate hikes, we think this can suppress demand, imports and squeeze lending in the upcoming quarters, but impacts will be seen with time lags. The Bank may consider increasing key rate at its upcoming meetings to additionally tighten monetary conditions to limit the upward deviation of inflation from the target, but this will depend on the course of inflation in Q4.
Figure 1: $/Ruble, September 2020 - September 2023
Source: Datastream
Despite general consensus among economists forecasting no change in the key rate on September 15, CBR surprised the analysts. (Note: Our prediction was a hike by 50 bps to 12.5%). As specified by the Monetary Policy press release by the CBR today, CBR remains concerned about higher inflationary pressure seen across an increasingly broader range of goods and services, growing domestic demand exceeding capacity, along with weakening ruble.
Another surprise came from the forecast front. CBR updated its projections of the key rate to 13-13.6% for the end of this year. The key rate is expected to stand at 11.5-12.5% in 2024 (up from previous 8.5-9.5%). In 2025, the Bank predicts the key rate at 7-8% (up from 6.5%-8.5% previously). According to the updated forecast, annual inflation will also stay at 6.0–7.0% in 2023.
On the monetary policy front, CBR noted that interest rates have begun rising in the credit and deposit market after the steep rate hikes while the impacts is also seen in slowing lending, which is due to the fact that monetary policy impacts the economy and inflation with time lags.
In addition, rate decision was well perceived by the markets, as MOEX index increased by 0.49% and reached 3,154.78 points while the dollar decreased by 0.7% to 96.6 rubles, and the euro by 0.74% to 103 rubles. Another supportive message came from president Putin who made comments on the course of the economy today, stating that the situation in the Russian economy is stable and developing soundly, which would appear to back the tighter policy.
Even so, it appears buoyant domestic demand continues to contribute to pump up imports which has been once trigger for the Ruble to lose value. Increasing consumer spending seems supported by the expansion of lending and increased real wages. According to the CBR, high demand for imports coupled with reduced exports is a key factor of the ruble’s depreciation since early 2023.
In line with these developments, we predicted that further hikes in the policy rates are most likely in 2023. We also underlined that further tighter monetary policy is required to curb the inflation further considering inflation is quickly deviating from the target in the current framework. It appears our predictions have been right so far, but slightly lower than CBR’s moves.
We believe the percentage of further key rate increases will depend on how significantly incoming currency and CPI data will affect bank’s estimate of the developments. As we mentioned in earlier pieces, time is required for balanced growth in lending and sustainable disinflationary trends to take stage. Under current conditions, we expect inflation will likely continue to bite, while inflationary expectations and currency volatility are predicted to remain despite tightening continues. We foresee the policy rate at 13% by end 2023.