The board of the Central Bank of Russia (CBR) at the policy meeting of February 14 resolved to keep the key interest rate at 21%. As followed by bne IntelliNews, this is in line with expectations, as keeping the key rate unchanged was the broad market consensus.

As followed by bne IntelliNews, the CBR's board at the final policy meeting of 2024 resolved to maintain the key interest rate at 21%, defying the expectations and despite stubborn inflation approaching double digits by the end of the year.

Lending growth versus inflation

Inflation is still trending outside of the CBR’s guidance, far from the target 4% at double-digit level of 10%, but the regulator was expected to be encouraged by a sharp decline in both corporate and retail lending at the end of 2024.

In the press-release following the decision the CBR admitted that “current inflationary pressures remain high” and the economy remains overheated as “the growth of domestic demand continues to significantly outpace the expansion of the supply of goods and services”. 

However, the CBR indeed pointed to “the cooling of credit activity” that has become “more pronounced”, and noted the growing population's propensity to saving as Russians are preparing to earn record interest on banking deposits in 2025. The CBR also lowered its forecast for loan growth to the economy for 2025-2026.

Trump and Ukraine ignored by Nabiullina (for now)

The latest bombshell breakthrough in communication between the new US administration of President Donald Trump and Vladimir Putin could have also given another reason for optimism. Ruble exchange rate strengthened to the best in months and demand for federal ruble OFZ bonds soared following the Trump-Putin call, but the CBR press-release refrained from commenting on it.

The Governor of the CBR Elvira Nabiullina at a press-conference following the key interest rate decision implicitly stated that the regulator is not factoring in any possible settlement of the full-scale military invasion of Ukraine in its macroeconomic forecasts.

“We do not have this factor in the base scenario. For now, I think it is premature to include it in the scenario, especially in the base scenario. Everything will depend on the development of the situation. It seems impossible to calculate the exact impact on the economy and inflation,” Nabiullina said in response to RBC business portal. 

She added that she does not want to “speculate on this topic at all,” according to RBC.

“We do not undertake to assess or predict the results of attempts to restore political dialogue between Russia and the US, but the changes in the ‘external environment’ as a result of these attempts could be very significant - both for the better and for the worse compared to the situation before Trump took office,” Renaissance Capital analysts comment. 

However, Nabiullina did comment on the ruble strengthening that started in February due to slower imports growth, stabilisation of Chinese yuan liquidity deficit, and adaptation to the latest round of US financial sanctions in November. The head of the CBR welcomed ruble strengthening as a disinflationary factor, should it remain sustainable. 

But the strengthening of the ruble itself is not the only factor that could lead to cutting the key rate, she added, as cited by RBC.

Different approach to inflation targetting

According to the CBR 's forecast, given the ongoing monetary policy, annual inflation will decline to 7%-8% in 2025, return to 4% in 2026 and be on target thereafter. In the baseline scenario, the CBR expects inflationary pressures to begin to gradually decline in the coming months under the influence of “cooling lending and high savings activity”, according to the press-release.

Commenting on the higher inflation forecast for 2025, Nabiullina said that the annual inflation “will have a long braking path due to strong inertia”. 

“It is noteworthy that the CBR kept the rate unchanged while raising the inflation forecast for end-2025 by 2.5-3 percentage points (to 7%-8%) and raising the economic growth forecast by 0.5 percentage points (to 1%-2%),” Renaissance Capital analysts commented.

The analysts surveyed by RBC were “surprised” by the CBR raising the inflation forecast while not taking any interest rate action, seen as uncharacteristic of the regulator. Sofya Donets of T-Investments suggested that the CBR does not want to repeat the dynamic of 2024 when it constantly had to catch up with the actual inflation readings and revise the forecast upwards.

As for the GDP growth forecast, “the forecast maintains economic growth, albeit slower, but you shouldn't call it stagflation,” Donets argues, believing the CBR is still treating the economy as experiencing significant external shocks to which it needs to adapt.

“We are at a turning point right now, not only in terms of geopolitics, which is driving [the] market this week, but also in terms of the economy,” Donets stressed.

The CBR is thus playing a balancing act of returning inflation to its target at a reasonable horizon and avoiding excessive volatility of the economic output, VTB bank’s analysts suggest.

Renaissance Capital, however, sees the divergence between the worsening inflation forecast and no policy action taken as a sign that the CBR believes the current monetary and regulatory tightening is high enough and that the key interest rate has already peaked out (in the absence of negative shocks).

“We believe that today's decision confirms our earlier conclusion that the CBR has abandoned its ‘uncompromising’ fight against inflation since December and has changed its policy approach to a more balanced inflation targeting that also takes into account the costs of additional monetary tightening for the economy and its sectors,” RenCap analysts argue. 

RenCap analysts suggest that the CBR has become “somewhat more forward-looking” and that  “future lending dynamics are in some ways becoming at least as important - if not more important - than inflation figures over the next few months”.

Interest rates expected to decline

The CBR believes that “the tight monetary conditions that have been achieved” so far are enough to resume “the disinflation process and a return of inflation to the target in 2026”.

But the press-release still warned that hiking the rate remains on the table as at the next meeting the regulator will still “assess the expediency of raising the key rate at the next meeting, taking into account the speed and sustainability of the decline in inflation”. 

The CBR also traditionally warned against overspending in the budget, noting that while fiscal policy “normalisation in 2025 will have a disinflationary effect, changes in the parameters of the budget policy may require adjustments to the monetary policy being pursued”.

Despite these warnings, RenCap analysts maintain the forecast of key rate being cut to 16% by the end of 2025, with the the start of the key rate cut cycle in 2Q25. The analysts surveyed by RBC also expect the key rate to be cut to 14%-18% by the end of the year, with some not excluding a hike to 22%-23% in case inflationary conditions worsen severely.

The next policy board meeting is scheduled for March 21 2025.