The CBR is due to hold a Board of Directors meeting today and decide on key policy interest rates. Currently, the refinancing rate is 8.00%, the one-day REPO fixed rate is 6.25%, the one-day REPO auction rate is 5.25% and the overnight deposit rate is 4.00%.
We expect the CBR to leave all rates unchanged, but renew its press release towards a more hawkish tone. To recap, in our base case scenario, we see the CBR implementing a new round of monetary policy tightening in September-October, with 50bp hikes in all key policy interest rates. The main risk to our scenario is the possibility of a hike in all rates, or only the deposit rate, of 25bp already today.
The regulator currently faces: i) headline CPI which is about to exceed the upper boundary of the CBR’s end-year target of 5.0-6.0%; ii) an upward trend in core inflation that has emerged in recent months (with ex-food, gasoline and regulated tariffs CPI just exceeding next year’s target for headline CPI of 4.5-5.5%); iii) the risk of an upward move in inflation expectations on the back of a simultaneous increase in regulated tariffs, weak RUB and increasing food prices (due to problems with the global and local harvest) combined with strong wage growth; and iv) still strong internal demand, wage and lending growth.
In this environment, we think that the CBR needs to take bold steps in order to preserve credibility and anchor inflation expectations. Tighter monetary policy is also needed to bring internal demand back to sustainable growth path. We also believe that in order to cool lending growth non-monetary measures will be more efficient. Recent statements from CBR officials, such as Alexey Ulyukaev’s interview to Izvestia in mid-July, confirm that regulator is now close to hiking interest rates for the first time this year.