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CBR Monetary Policy Preview - Sitting this one out

Today, the CBR is due to take its first monetary policy decision after the emergency 150bp rate hike in early March.

We see no grounds for policy rate changes at the current stage. On the one hand, uncertainty related to geopolitical tensions remains too high to start reversing the recent temporary tightening measure, while on the other, intense savings’ dollarisation, which is behind the current pressure on RUB, is fairly unlikely to be sensitive to rate hikes.

Pre-decision economy snapshot. There are many signs that, apart from the cyclical slowdown observed since the start of last year, the economy is now being hit by an uncertainty shock. Faced with heightened uncertainty, firms delay investment and hiring, while households choose to postpone discretionary spending. Thus, both investment and consumer demand have been surprising on the downside recently – the trend is set to persist over the coming months, likely dipping the economy into a recession (if only technical) over the next two quarters.

Pre-decision inflation snapshot. The pace of inflation has been picking up since February and as of mid-March is now running around 6.4% YoY. The acceleration looks to be related to the pass-through impact from the weaker RUB, which is most visible across the more exposed (and least hedged) categories like imported vegetables and fruits, tourist services, etc. There is also tentative evidence of the pass-through across the core basket (electronics, home appliances, etc.) but to a larger degree the sharp sell-off in RUB it is yet to be translated into the final prices of imported goods. Hence, the headline CPI is likely to accelerate in the coming 2-3 months (to 6.5-7.0%) before disinflation (tariffs, food and cyclical) comes with a vengeance in 2H14.

For more details, see our CBR Monetary Policy Preview - Sitting this one out, published this morning. 
Vladimir Kolychev, Daria Isakova
VTB Capital analyst


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