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Rates – CBR announces 150bp hike at emergency meeting

Yesterday morning, the CBR lifted rates 150bp (with the key rate from 5.50% to 7.00%) at an emergency meeting. The decision follows the recent escalation of tensions in Ukraine and associated pressure on the local currency. The regulator noted that this measure was aimed at addressing financial stability and inflationary risks associated with “the heightened volatility in financial markets”.

Move aimed at stabilising RUB. The significant intensification of household demand for hard currency following political events over the weekend, as well as anticipated pressure from market participants, have likely been the main considerations behind this resolute response. Thus, the interest rate differential between local and foreign currency deposits is now likely to become less attractive for conversion.

Extraordinary interventions. Judging by the behaviour of the local currency, the CBR has likely complemented the intervention mechanism with some extraordinary component, although it has yet to make any public statement in this regard. It is clear, nevertheless, that the currency is becoming a binding constraint for policy and the regulator is likely to prefer defending RUB in the event of continued pressure. Once the dust settles, however, we would expect the currency regime to become even more (not less) flexible.

Short-term uncertainty prevails, but ultimately reversal is on the cards. The CBR noted that the decision was temporary, but the timing of the reversal seems uncertain at the current juncture, especially given the political uncertainty. Once the tensions abate and pressure on RUB fades, however, there could be significant room for policy easing, particularly given the phase of the business cycle and benign inflation outlook over 2H14. We currently put our policy rates forecasts under review, but overall suggest that a return to the pre-decision levels of interest rates by the year-end is fairly likely.

Vladimir Kolychev, Daria Isakova
VTB Capital analyst

rates, CBR

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