All eyes on Russia's CBR as market expects reaction to volatility

All eyes on Russia's CBR as market expects reaction to volatility
All eyes on Russia's CBR as market expects reaction to volatility with a rate hike
By bne IntelliNews September 13, 2018

The Central Bank of Russia (CBR) will hold a policy meeting on September 14 and is expected to react to the recent market volatility, ruble weakening, and pressure on Russian assets with a decision on key interest rate currently at 7.25%.

Last week the governor of the CBR Elvira Nabiullina said that the regulator sees “little if any” reasons to cut the key interest rate of 7.25%, while acknowledging "several factors" that would allow to bring possible hike of the rate to the table.

This made a notable toughening of the CBR rhetoric that was expected to cut the rate at least one more time by year-end. Previously analysts suggested that increased emerging market volatility and drum of sanction risks could force the CBR to go out of its way and even hike the rate.

“The consensus is that the CBR will keep rates on hold, but the market has already priced in a 25bp rate hike. That means if the CBR hikes there will be no economic impact, but it will enhance the CBR reputation as an independent and conservative regulator. And in this sanctions rich environment that is a good thing,” Elliott Auckland, chief economist with International Investment Bank (IIB) told bne IntelliNews.

Key risk factors for Nabiullina are high global financial market volatility and inflation moving closer to 4% target faster than expected under external pressure. Giving a radical move lead, on September 13 the central bank of Turkey hiked the rate by surprise 6.25pp from 17.75% to 24%, trying to tame the weakening of the currency. 

Analysts are not expecting the CBR to react as strongly. Out of 24 analysts surveyed by Reuters 23 expect the CBR to maintain the rate at 7.25%. However, Sberbank CIB allows for a rate hike of up to 50bp to prevent a sell off of Russian assets. 

VTB Capital on September 13 suggests that the CBR will leave the key rate at 7.25% until the next meeting on October 26, while highlighting increased risks and taking time to distinguish trends from currency volatility noise. The CBR is also likely to see no scope for further cuts in 2018 or possibly through the second quarter of 2019.

Consumer Price Index (CPI) inflation in August tipped above 3% registering 3.1% year-on-year according to the September 5 report of Rosstat statistics agency. Inflation reading in August was up from July's 2.5% y/y and above the CBR's forecast of 2.8-3%, reaching the highest since September 2017. However, its still remained close to post-Soviet record-lows.

Inflationary expectations, also closely watched by the regulator, also inched up by 0.2pp to 9.9%, the highest since 2017. Expectations of higher prices grew due to weaker ruble and planned VAT hike in 2019, according to the CBR's survey.

Analysts surveyed by Vedomosti daily last week did not believe that the CBR will resort to hiking the rate already at the next policy meeting in September. BCS Global Markets analyst Vladimir Tikhomirov suggests that the central bank will only increase the key borrowing rate if inflation exceeds 5%.

"The rise in Russian inflation to 3.1% y/y in August, combined with Governor Nabiullina’s hawkish comments yesterday, will add fuel to expectations for an interest rate hike," Capital Economics commented on September 5, while adding that "underlying price pressures still extremely weak, we think that the central bank will hold off from tightening policy." 

Previously in spring and summer CBR gave clear signals that the monetary easing cycle will remain on hold into 2019, as the regulator was cautious on inflationary effects of the adopted VAT hike to 20%. Prior to that the rate-cutting cycle that the CBR started at the beginning of 2018 was interrupted by the latest round of US sanctions in April.