Russia Monetary Policy December 2020

Russia: Central Bank holds key rate steady in December

At its meeting on 18 December, the Board of Directors of the Central Bank of the Russian Federation (CBR) kept the key interest rate unchanged at a record low of 4.25%. The move, which was in line with analysts’ expectations, marked the third consecutive hold and came amid rising inflation and ailing economic activity.

The decision was chiefly driven by rising inflationary pressures. Inflation increased to 4.2% in November (October: 4.0%) amid a volatile ruble, and it is expected to jump to 4.6%–4.9% in December according to the Bank’s estimates, thus trending markedly higher than projected in the CBR’s October forecast. Although the trend seems to be led by one-off factors, the Bank expressed its concern over “a prolonged upward influence on prices amid the growth in households’ and businesses’ inflation expectations and supply-side restrictions”, thus leaving it with little space for maneuver. Moreover, while the second wave of Covid-19 is set to derail the economic recovery in Q4, the downturn appears to be much softer than in Q2, further supporting the CBR’s decision to stay put.

In the accompanying statement, the Bank seemed to slightly soften its dovish tone, highlighting waning disinflationary risks in 2021 and saying that it “will assess the subsequent developments and the existence of a potential for additional key rate reduction”. That said, the Bank continues to expect inflation to come in at 3.5–4.0% in 2021 and stabilize close to 4% later on. This, coupled with a less grim short-term economic outlook—the Bank now expects GDP to fall 4.0% this year compared to a 4.0%–5.0% contraction projected in October—signals that the period of monetary policy easing has likely ended and that a policy normalization cycle could kick in as early as late 2021.

Commenting on the monetary policy outlook, Artem Zaigrin, chief economist at SOVA Capital, said:

“The tone of CBR’s statement appeared to be more reserved vs. the previous meeting. We believe that CBR could keep the key rate on hold throughout 1Q21 given the rise in inflationary pressures despite government attempts to stem the growth in food prices. If Russia’s economic growth gains traction in 2021 as we expect, it would not make sense for CBR to ease the policy stance further in 2Q21-4Q21 and prepare for the policy normalization cycle from 1H22.”

The Bank of Russia will hold its next key rate review meeting on 12 Febraury 2021.

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