Russia Monetary Policy June 2021

Russia: Central Bank hikes key rate again in June; turns more hawkish

At its meeting on 11 June, the Board of Directors of the Central Bank of the Russian Federation (CBR) hiked the key interest rate by 50 basis points to 5.50%. The move, which marked the third consecutive hike, was driven by the ongoing flare-up in price pressures, with the Bank’s firmly hawkish tone hinting at more policy tightening ahead.

Inflation jumped to 6.0% in May (April: 5.5%), marking the highest reading since October 2016 and overshooting the expectations of both market analysts and the Central Bank. As such, inflation moved further above the Bank’s 4.0% target, as the release of pent-up demand continued to add fuel to the price rally. Moreover, according to preliminary data, inflation rose further in early June amid a faster-than-expected recovery in economic activity, leaving the Bank with little option but to hike rates again.

In the accompanying statement, the Bank struck a decisively hawkish tone, stating that “the balance of risks has significantly shifted towards pro-inflationary ones”. On top of that, the CBR suggested that the robust economic recovery could “lead to a more substantial and prolonged deviation of inflation upward from the target”, creating “the necessity of further increases in the key rate at the upcoming meetings”. This, coupled with the fact that the Bank had considered raising rates by 1.0 percentage point in June, points to further monetary policy tightening in the coming months.

Commenting on the course of the monetary policy cycle, Artem Arkhipov, economist at UniCredit, said:

“While rate hikes will take at least four quarters to fully influence domestic demand, the tightening cycle is not over. We think that there is a high risk of exceeding the upper boundary of the neutral range this year, and the CBR could deliver another 75–100bp in rate hikes later in the year in order to play down expectations and normalize credit activity. This sets the stage for further RUB appreciation this year, driven by high oil prices and rising carry.”

Artem Zaigrin, chief Russia economist at SOVA Capital, agrees, noting:

“We think the CBR took an aggressive stance by delivering very hawkish statements. […] The identification of inflation origins (demand-driven overheating) could imply that the CBR expects the CPI trajectory to shift to more than 6% yoy and away from the 4% target in the coming quarters. With this in mind, we think the CBR could further pre-emptively hike the key rate at upcoming meetings to beyond the mid-term neutral level of 5–6% yoy, and we believe the rate-hiking cycle could end at 6.5% yoy by year-end 2021 before gradually easing starting from Q2 2022.”

The Bank of Russia will hold its next key rate review meeting on 23 July.

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