Russia: Central Bank holds key rate in February
At its 8 February meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) held the key interest rate at 7.75%, as was expected by market analysts following the hike at its previous meeting. After a two-year easing cycle designed to support activity, a weak ruble and mounting price pressures caused the CBR to reverse course in the second half of 2018, tightening interest rates to anchor inflation.
The decision reflected a wait-and-see approach by the Bank to see if its past two rate hikes are enough to tame price pressures. While risks to the inflation outlook are elevated, so far, price pressures have been moderate. Despite the hike in the VAT in January, inflation remained at the lower end of the Bank’s projection, although the CBR added that the full effects of the VAT will not be seen until April. In addition, the external environment has improved modestly since the last meeting due to the U.S. Federal Reserve’s recent change of tone. The Fed signaled that it will now tighten rates more gradually this year than previously expected, which should reduce risks of capital outflows and a knock-on effect on the ruble or prices. The Bank kept its inflation forecasts unchanged and reiterated that it sees inflation peaking in the first half of 2019 before easing to 5.0–5.5% by the end of 2019.
Looking ahead, the Bank signaled that it will continue to take a cautious stance, although its tone was slightly more neutral than the previous meeting. Notably, the Bank removed a statement stating that it “will consider the necessity of further rate hikes”, suggesting a less hawkish stance. However, overall the Bank still emphasized that risks are titled towards higher price pressures especially in the near-term, amid uncertain external conditions and the VAT increase.
Commenting on JPMorgan’s outlook for monetary policy, analyst Anatoliy AShal elaborates:
“All in all, although a moderately hawkish bias was preserved, it appears that the CBR is inclined to stay in wait-and-see mode for now, assessing the impact of prior tightening and waiting for more clarity on inflation outlook. We project inflation to be below CBR expectations and expect the CBR to stay on hold in March and through 2018.”
The next monetary policy meeting is scheduled for 23 March.