Russia hikes rates unexpectedly due to currency weakness, risk of further sanctions
By Alexander Bueso
Date: Monday 24 Sep 2018
(Sharecast News) - Central Bank of Russia surprised financial markets on Friday, hiking its main interest rate in response to the recent overshoot of its inflation target on the back of weakness in the rouble and food price inflation, although Governor Elvira Nabiullina had reportedly flagged that possibility a week beforehand.
The monetary authority hiked its main policy rate, the one-week repurchase rate, to 7.50%.
Of the 41 analysts polled by Bloomberg, just one, Valery Vaisberg at Region Investment, correctly anticipated the decision taken by policymakers in Moscow.
Did more rate hikes lie ahead in the immediate future? Central bank Governor Elvira Nabiullina reportedly said that further policy tightening wasn't inevitable, but couldn't be ruled out.
In their policy statement, rate-setters at the CBR also called attention to growing price pressures on the basis of most inflation gauges and recent slight increases in businesses' and households' inflation expectations.
"The balance of risks has further shifted towards proinflationary risks. Main risks stem from highly uncertain external conditions and their impact on financial markets," CBR said in a statement.
"Further yield growth in advanced economies, capital outflow from emerging markets together with geopolitical factors might cause volatility in financial markets to persist, and affect exchange rate and inflation expectations."
Indeed, the central bank raised its year-end 2019 forecast range for the country's Consumer Price Index by a full percentage point to between 5.0% and 5.5%.
According to Nabiullina, a roughly 9.0% fall in the rouble's nominal effective exchange rate was expected to contribute almost one percentage point to the annual rate of growth in CPI, with a value-added tax hike expected to add one percentage point in 2019.
In August, the annual rate of growth in consumer prices had picked-up to 3.1% and by end-2018 CPI was seen climbing to between 3.8% and 4.2% and then peaking in the first half of 2019 before then slipping to between 5.0% to 5.5% by end-2019.
CBR also referenced the "slight" tightening seen in monetary conditions, albeit alongside a "significant" increase in government debt yields.
Measured in quarterly annualised terms, CBR projected CPI would fall back more quickly towards 4.0%, in as early as in the second half of 2019.
Linked to the outlook for the country's currency, the rouble, the monetary authority highlighted the "high" current account surplus which, it said, "significantly exceeds" the amount of external debt repayments scheduled over coming months.
CBR also drew attention to Russia's recent decision to suspend foreign currency purchases in the domestic market, which analysts expected would further support the currency.
Commenting on CBR's decision, William Jackson at Capital Economics said: "The tone of the Russian central bank's press conference suggests that today's interest rate hike was a preemptive move against an expected tightening of US sanctions, not the start of a cycle.
"As things stand, we think it's most likely that rates will be left on hold this year and next. But the outlook will hinge on the measures the US imposes and, if there are any moves over the next six months, these will be up."
Daria Isakova, Senior Economist at SOVA Capital, concurred, telling WebFG that the decision to hike was a "one-off move in response to a significant deterioration in the external environment."
Indeed, her expectation was that the CBR would return to an accommodative policy once disinflation took hold.
"For another hike to happen in Russia, there should be another spike in inflation expectations (for example, a further intensification of capital outflows from EM could create such a risk)," she told WebFG.
"The spike should be severe enough to jeopardize the new CBR inflation outlook of 5.0-5.5% for 2019, that is highly conservative, to become a trigger for an additional hike."
She pegged the probability of such a scenario materialising at 20%.
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