Russia Monetary Policy February 2022

Russia: Central Bank hikes key policy rate again in February

At its meeting on 11 February, the Board of Directors of the Central Bank of the Russian Federation (CBR) raised the key interest rate by 100 basis points to 9.50%, doubling down on its 100 basis point hike in December. The move, which marked the eighth consecutive increase since March 2021, brought the rate to a five-year high.

The Bank’s move was driven by spiraling inflationary pressures amid a tight labor market and heightened geopolitical risks. Inflation rose to 8.7% in January (December 2021: 8.4%) and edged up further to 8.8% in early February, thus trending significantly above the Bank’s October forecast. Soaring commodity prices, especially for energy, and booming demand—in the face of limited production capacity and constrained labor supply—underpinned the acceleration. Moreover, growing tensions between Western countries and Russia over Ukraine fueled fears over the potential for sanctions, exerting further upside pressure on prices.

In the accompanying statement, the Bank struck a firmly hawkish tone. With inflation expectations at multi-year highs, the Bank stressed that it “cannot say for today that the cycle of key rate rises has completed” and that it “holds open the prospect of a further key rate increase at the upcoming meetings”. As a result, the Bank revised its year-end inflation forecast upwards to 5.0%–6.0% (previously expected: 4.0%–4.5%) and now expects inflation to reach the target rate of 4.0% only in mid-2023. Moreover, the CBR raised its projections of the average key rate level in 2022 to 9.0%–11.0% from 7.3%–8.3%, hinting at further tightening in the coming months. The majority of our panelists are currently revising their forecasts following the Bank’s move.

Commenting on the monetary policy decision, Artem Zaigrin, Chief Economist at SOVA Capital, said:

“The tone of CBR’s statement and its mid-term forecasts were of particular interest to us. The statement’s tone was again quite hawkish, as it guided for additional hikes at upcoming meetings. The higher range for the average policy rate assumes not only another 150 basis points or more in rate hikes but, more importantly, a slower easing of CBR’s stance in H2 2022 and 2023. In our view, the forecasts could mean the real rate will be 3.5%–4.5% throughout 2022–23 vs. the current mid-term neutral rate of 1.0%–2.0%.”

Meanwhile, Anatoly Shal, Russia economist at JPMorgan, noted:

“CBR’s central scenario is for another 50–100 basis points in hikes in the coming months. Given the recent track record, we think the CBR is more likely to over- than under-deliver, and hence expect another 100-basis point hike at the March meeting, which should be the last one in the cycle, with the peak rate at 10.5%. We assume that the CBR will begin policy easing at the start of 2023 and the easing cycle will be gradual.”

The Bank of Russia will hold its next key rate review meeting on 18 March.

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