Despite the hike, the comments were rather dovish. The CBR mentioned GDP at potential level as well as the slowdown in retail sales and investment activities. Its view on the economy remained close to neutral, as it also cited the recovery in industrial production, tight labour market and strong lending activity.
We treat the hike by the CBR as a step to contain inflation expectations and build the regulator’s credibility within the inflation targeting framework. At the same time, recent market developments show that under the current framework, liquidity conditions might matter more than the outright level of base rates and we think RUONIA will only partly reverse its downward move of last month.
The CBR elaborated on inflation risks and stated that headline inflation had advanced to 6.3% YoY as of 10 September, exceeding its target for this year, and would increase further in the near term. Despite the oft-discussed inflation drivers this year the regulator highlighted the steady increase in core inflation.
CBR to hike 25bp again in 4Q12. It might then pause on the back of a further acceleration in both core and headline CPI. The slowdown in the growth of the economy due to fiscal tightening and cooling lending activity (yesterday’s lending data was strong, which helped the CBR to make hawkish decision) will likely have the most impact on underlying inflation trends at the beginning of next year. The decision is mildly negative for bonds and positive for RUB.