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RUB tax period and weekly CPI in focus - Hugarian MPC to leave rates Unchanged

This week is fairly light on both the data front and in terms of the policy agenda, with markets likely focusing on RUB's performance through the tax period, and the central bank meeting in Hungary on Tuesday.

Our View: Local news flow is likely to be rather muted after the raft of monthly statistics published last week. Local markets are likely to focus on RUB’s behaviour through the peak of the tax period, with MET and profit tax to be paid on Tuesday and Friday, respectively. The CBR's threat to tighten RUB liquidity, as well as the likely conversion of revenues by exporters, helped RUB to gain some ground late last week and we might expect it to sustain those gains this week.

It will be interesting to see if the demand for FX-swap tops the maximum limit (the RUB equivalent of USD 2bn) or whether the CBR follows through with the threat to squeeze RUB liquidity and tightens REPO limits as well. Overall, we deem the regulator's intention/comments about abandoning the upper bound of the interest rate corridor, and thus sacrifice the five years of progress it had achieved in streamlining its operational framework, as unfortunate given that the key policy rate has become a true anchor for the market and the broader economy. Allowing money-market rates to spike far from the key policy rate (even for a very short period of time) risks deanchoring expectations again, let alone the risks to financial stability such policy might involve.

On the data front, we await the weekly CPI print on Wednesday to finalise our fullmonth expectations for November (likely in the 8.8-9.0% YoY range). And despite the view that it could not get worse for inflation after the recent bout of currency weakness and food import restrictions, buckwheat prices are now spiralling out of control (up almost 30% in recent weeks) on harvest concerns across several regions. Moreover, the pass-through from the food import ban onto prices of dairy products and vegetables seem to have intensified in recent weeks, as we thought they might heading into the unfavourable season.

Elsewhere across the CE3 region, the MPC meeting in Hungary is likely to be the main focus this week. The last time Hungary cut rates was in July and since then the MPC has kept its rate guidance unchanged, promising not to touch rates before the end of 2015 unless the recovery proves stronger than anticipated or it has to protect the forint from a strong deterioration in risk sentiment. It could be argued that there are now reasons to tilt more to the dovish side, in light of rising growth concerns in the EU as well as deflationary pressures from declining commodity prices. However, we would not expect any significant changes in the official rhetoric now, especially as the MPC has other policy tools to focus on at the moment: Funding for Growth Scheme, FX debt exchange and interest rate swaps.

Vladimir Kolychev
VTB Capital analyst

liquidity, CBR, CPI, dollar

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