The Central Bank of Russia (CBR) at the last policy meeting of 2020 resolved to maintain the key interest rate unchanged at 4.25%. The regulator has previously kept the rate flat in September and October as well.

As reported by bne IntelliNews, although the CBR pledged to continue monetary easing to help COVID economic recovery, the analysts largely expected the key rate to remain flat as inflation in November has breached the CBR's target of 4%.

Inflation is expected by the CBR to overshoot the expectations in 2020 overall at 4.6-4.9%. At the same time the CBR is alarmed over persisting inflationary risks in 2021. 

In the accompanying press-release the CBR noted the improving external outlook due to positive expectations on COVID vaccine. In 2020 the central bank expects an economic contraction of 4%, with recovery to growth seen in 2Q21 after taming COVID-19 and recovering consumer demand.

The analysts surveyed by Vedomosti daily believe that the CBR will maintain the key interest rate unchanged at least until mid-2021.

Kommersant daily noted that the CBR has changed the formulation of its intentions in the press-release from "evaluating the appropriateness of interest rate cut" to "evaluating the potential for further interest rate cuts", which is seen as a signal of a more prudent stance in the short-term.

The CBR said that it does not think deflationary risks will be as significant in 2021 as it did during its previous meeting due to inflationary risks and their secondary effects.

Although consumer price inflation (CPI) is still expected to moderate to 3.5-4% y/y by YE21, CBR seems less convinced of this outcome, said analysts at Sova Capital.

“The tone of CBR’s statement appeared to be more reserved vs. the previous meeting. We believe that CBR could keep the key rate on hold throughout 1Q21 given the rise in inflationary pressures despite government attempts to stem the growth in food prices. If Russia’s economic growth gains traction in 2021 as we expect, it would not make sense for CBR to ease the policy stance further in 2Q21-4Q21 and prepare for the policy normalization cycle from 1H22,” Sova Capital said in a note.

In its statements the CBR’s reasons for its decision were as follows:

• CPI was revised upwards from 3.8-4.2% y/y to 4.6-4.9% y/y by YE20 due to the impact of short-term one-off factors. Increased prices in specific categories and the continued pass-through of the ruble’s weakness to consumer prices will offset the disinflationary effects of subdued demand. CBR is concerned that such one-off inflationary factors could have a long-term impact on expectations and momentum.
• CBR still sees disinflationary factors as having some effect in 2021, albeit less than previously expected. Inflation could be within the anticipated range of 3.5-4% y/y by YE21.
• The monetary conditions have not changed significantly since the October decision, as interest and deposit rates have stabilized as loan growth has continued. Mid-term OFZ yields improved on the back of expectations of the global economic recovery and improvements on the commodity market. The withdrawal of regulatory relaxations could be key for monetary conditions next year.
• The high-frequency indicators point to a pause in the recovery in economic activity in 4Q20. However, the worsening COVID-19 situation has had much less of an impact on economic dynamics compared to 2Q20.
• CBR still expects GDP to contract 4% y/y, while the economic recovery is expected to start in spring 2021 due to a better outlook on COVID-19 and vaccines. The mid-term trajectory depends on the progress of the pandemic, the recovery in private demand, structural shifts in consumption and an accommodative monetary policy.
• CBR does not think deflationary risks will be as significant in 2021 as it did during its previous meeting due to inflationary risks and their secondary effects. In the mid-term, the risks of volatility on global financial markets, disruptions in supply chains, the additional cost-push to preserve workers' health and price spikes in soft commodity markets could skew the balance. The worsening COVID-19 situation, the damage to economic structures and trade wars could have a meaningful impact on long-term potential. CBR still sees the fiscal consolidation as a crucial disinflationary factor in 2021-22.

The tone of CBR’s statement is less dovish and analyst say they believe the CBR could keep the key rate on hold throughout 1Q21 given the rise in inflationary pressures despite government attempts to stem the growth in food prices.

Russian President Vladimir Putin in recent weeks have been complaining about the rising cost of pasta and sugar and the government is currently negotiating with the major food producers to cap price rises temporarily.

“If Russia’s economic growth gains traction in 2021 as we expect, it would not make sense to ease the policy stance further in 2Q21-4Q21 and prepare for the policy normalization cycle from 1H22,” Sova Capital said.