Russia Monetary Policy April 2021

Russia: Central Bank delivers another surprise hike in April

At its meeting on 23 April, the Board of Directors of the Central Bank of the Russian Federation (CBR) hiked the key interest rate by 50 basis points to 5.00%. The move, which followed March’s unexpected hike, came as another surprise to market analysts, most of whom had predicted a smaller 25 basis-point increase.

Inflation rose to an over four-year high of 5.8% in March (February: 5.7%), once again significantly overshooting the Bank’s forecast and its 4.0% target, and prompting it to further tighten its monetary policy stance. Price pressures were chiefly fueled by a rapid recovery in domestic demand and supply chain disruptions. Meanwhile, mounting geopolitical risks stemming from the military build-up on the border with Ukraine, renewed Western sanctions and diplomatic expulsions have hammered the ruble in recent weeks, further supporting the Bank’s decision.

In the accompanying statement, the Bank maintained its hawkish tone, hinting at the likelihood of another rate hike in the coming months as the economic recovery picks up steam and inflation remains elevated. The CBR expects the Russian economy to return to its pre-crisis level in H2 2021, which implies growth of 3.0–4.0% in 2021 as a whole. Meanwhile, the inflation forecast was revised higher to 4.7%–5.2% for 2021, and inflation is not seen easing to the CBR’s 4.0% target until mid-2022. Against this backdrop, for the first time ever, the Central Bank published a key rate trajectory, setting its average level for 2021 at 4.8%–5.4%. For 2022, the CRB projects the rate to average 5.3%–6.3%, before it returns to the neutral level of 5.0%–6.0% in 2023.

Commenting on the decision, Ariel Chernyy, economist at UniCredit, said:

“We were expecting the CBR to hike to 5.25% this year, returning the policy rate inside the neutral range of 5.00-6.00%. Following Friday’s 50bp move, the risk of more hikes has increased, and maybe closer to the mid-point of the CBR’s rate forecast of 5.75%—although the 6.00% level is still unlikely to be exceeded. We think demand growth and associated inflation pressures will be somewhat softer than the CBR currently anticipates.”

The Bank of Russia will hold its next key rate review meeting on 11 June.

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