Central Bank holds fire but strikes more hawkish tone in June

At its meeting on 7 June, the Central Bank of the Russian Federation (CBR) decided to maintain the key rate at 16.00%. The decision, which was largely in line with market expectations, marked the fourth consecutive hold this year and followed a cumulative 850 basis points of hikes since July 2023.

The Bank determined that a prolonged period of tight monetary policy was required to drive inflation toward its 4.0% target. Price pressures reversed their downward trend in Q1 and reached a near seven-year high in April–May. Despite noting one-time factors relating to tariff indexation that fueled inflation in early Q2, the CBR assessed that the rate of price growth remains at the levels observed in the first quarter of 2024. Additionally, the Bank observed that domestic demand growth continues to outpace production capacity—largely owing to a strained labor market amid military mobilization efforts—as well as noting increases in inflation expectations and credit growth.

In its communiqué, the CBR struck a more hawkish tone, indicating that bringing inflation back within target will require “a significantly longer period of maintaining tight monetary conditions in the economy than it was forecast in April”. Moreover, the Bank hinted at the possibility of hiking at its next meeting on 26 July; in a subsequent statement, Governor Elvira Nabiullina assessed that the likelihood of this scenario has increased. The CBR also admitted that upside inflationary risks had intensified since it last convened, stemming from fiscal stimulus and unfavorable exchange rate movements resulting from geopolitical tensions and international sanctions. Our Consensus is for the policy rate to be cut by close to 100 basis points by end-2024, though some panelists now see room for further policy tightening. The CBR will convene next on 26 July.

Clemens Grafe, analyst at Goldman Sachs, expects a hike by year-end: “We had expected the (typically hawkish) CBR to react to the slower-than-expected progress on disinflation, increasing inflation expectations, rising lending activity and above-trend growth by hiking its rate by 100bp. We have adjusted our forecast to reflect today's downside surprise. In light of the CBR communication, we retain our forecast for a 100bp hike at the next MPC in July, before rates will be kept on hold until Q1, when a careful cutting cycle will begin.”

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