Russia Monetary Policy October 2020

Russia: Central Bank stands pat in October

At its meeting on 23 October, the Board of Directors of the Central Bank of the Russian Federation (CBR) kept the key interest rate at a record low of 4.25%, as largely expected by market analysts. The decision marked the second consecutive hold.

The decision to hold fire was mostly driven by elevated inflationary pressures, which continued to mount over the past month. Preliminary estimates show inflation rising to 3.8% in October, from 3.7% in September (August: 3.6%), largely due to the weakening of the ruble. This, coupled with rising inflation expectations among households and businesses, and elevated geopolitical risks amid the upcoming U.S. elections, left the Bank with little room for maneuver, despite a slowdown in the recovery at the end of Q3.

In the accompanying statement, the CBR once again maintained its largely dovish tone and confirmed its readiness to slash interest rates if necessary. However, the Bank underlined that “although disinflationary risks still prevail over the medium-term horizon, the effect of short-term pro-inflationary factors has somewhat increased”, signaling that a rate cut by year-end is now less likely. As such, “given the current monetary policy stance, annual inflation will reach 3.5–4.0% in 2021 and will stabilize close to 4% later on”, according to the CBR. Meanwhile, the Bank now expects the Russian economy to shrink 4.0–5.0% this year, which is more moderate than its previous forecast of a 4.5–5.5% contraction. The Bank expects GDP to rebound 3.0–4.0% in 2021 and 2.5–3.5% in 2022.

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

“We continue to expect inflation momentum to drop visibly by early 2021 once FX-passthrough effects are behind, which should re-open the door for cuts. There should also be less geopolitical uncertainty by then. We therefore moved our call for two 25bp cuts to 1H21, with first cut tentatively set for February meeting. With that said, CBR’s body language suggests that risks to our call are probably skewed toward less easing.”

The Bank of Russia will hold its next key rate review meeting on 18 December 2020.

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