Russia Monetary Policy February 2021

Russia: Central Bank keeps rate unchanged in February, tone turns more hawkish

At its meeting on 12 February, the Board of Directors of the Central Bank of the Russian Federation (CBR) held the key interest rate stable at a record low of 4.25%. The move was in line with analysts’ expectations and marked the fourth consecutive hold.

The decision came on the back of a sustained build-up in price pressures. Inflation jumped from 4.9% in December to 5.2% in January, buoyed by a faster-than-expected recovery in demand and lingering supply-side restrictions. This, coupled with elevated inflation expectations among households and businesses, prompted the Bank to conclude that “disinflationary risks no longer prevail over a one-year horizon”, thus leaving no scope for rate cuts. A softer-than-expected contraction in GDP in Q4 2020 and healthy economic activity data in early 2021 further cemented the Bank’s view that there is no immediate need for policy easing.

In the accompanying statement, the Bank’s tone turned hawkish. With disinflationary risks no longer on the horizon in 2021—the CBR revised its end-of-year inflation forecast from 3.5–4.0% to 3.7–4.2%—the Bank seems to be considering a tightening of policy ahead, noting that it “will determine the timeline and pace of a return to neutral monetary policy”. The Bank left its medium-term inflation target at 4.0%, and it may start to hike rates when inflation nears this level.

Commenting on the monetary policy outlook, Anatoliy A Shal, economist at JPMorgan, said:

“We have brought forward the timing of the first hike to 1Q22, from 4Q22, previously, to reflect the CBR’s hawkish leanings and the accumulated information on growth, inflation and potentially slower pace of fiscal consolidation – a risk that popped up this past week. We now expect three rate hikes next year (vs. one previously) and see the rate at 5.0% by end-2022 (vs. 4.5%). That said, we think risks to our growth and inflation forecasts are skewed slightly to the upside, hence risks to our rate outlook are also probably skewed toward a more front-loaded path. 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 19 March.

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