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CBR Monetary Policy Preview – Credibility vs. reason

The CBR is to meet on 12 September to discuss monetary policy.  Yesterday we published a preview. The front page is provided below.

Although we continue to see little fundamental reason for additional tightening, ‘credibility rationale’ might prevail, and we believe that the CBR is likely to finish the tightening cycle with another 50bp hike this Friday. Meantime, there are signs (albeit far from alarming) of a dollar shortage, which the CBR might want to address.

Is there a need to tighten again? No.

The run up in inflation since the start of the year is mostly due to different kinds of supply-side shocks, especially in the food markets.

There were few signs that those supply-side shocks have contaminated the broader consumer basket, as core inflation continued to behave well.

Even the FX pass-through into core inflation has been muted, which is reflective of an economy running below potential.

We therefore believe that rates do not need to rise; however, this was also the case in April and July, the last two occasions the CBR hiked rates, by 100bp.

Will the CBR increase rates? Perhaps, Yes. The CBR’s take on inflation has been different from ours, and unless it has performed a U-turn on its own assessment policy, we believe that another rate hike this week is likely. It is our view that there are several reasons to expect the CBR to lift rates:

Inflation. Food import restrictions are set to keep headline CPI around 8.0% over the next three quarters, and the CBR will probably have to revise its forecast (in September) from 6.0-6.5%. In July, the CBR said that “if high inflation risks persist, [it] will continue raising the key rate”.

Rouble. The central bank has loosened control over the exchange rate and is now more likely to fight against potential pressure on the rouble.

Funding/liquidity gap. The CBR might want to enforce a faster convergence between rouble funding and lending growth.

That said, political room for additional tightening seems to be close to exhausted, and the CBR seems to have already started to soften its ultra-hawkish language. Nevertheless, the regulator might fear damage to its credibility if it fails to act after explicitly threatening to lift rates if inflationary risks materialise – especially in light of the looming upward revision to its own inflation forecasts. Given the above, we anticipate a 50bp rate increase this Friday, which we would expect to mark the end of the tightening cycle.

Signs of a dollar shortage: will the CBR step in? Recently, money-market rates have been consistently lower than the key policy rate, while o/n FX swap rates have sometimes dropped below the interest rate corridor floor. The main reason for this anomaly seems to be that following the introduction of sanctions, banks started to experience a mild shortage of dollar liquidity, which they covered in the swap market. So far, there is no evidence of an acute dollar shortage, and we believe that in the medium term banks will be able to repair it. Nevertheless, we would not rule out the CBR pre-emptively introducing a dollar FX swap facility (stand-by or auction-based) at its next meeting – especially in light of CBR deputy chairwomen Ksenia Yudaeva highlighting that the regulator is ready to deploy non-standard tools.

Daria Isakova, Vladimir Kolychev
VTB Capital analyst


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