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CBR – Monetary policy preview – waiting for a big bazooka


The CBR is due to hold a monetary policy meeting today, with the pressure to deliver bold policy action having increased significantly over the last two weeks, following the brisk decline in oil prices and consequent pressure on the currency.

The CBR is unlikely to put off raising interest rates substantially in an attempt to stem FX volatility. We expect another 150bp hike in the key policy rate and do not rule out the regulator lifting the cap of the rates corridor further, guiding for a more significant increase in short-term money market rates. In our view, more resolute action to replenish the system with dollar liquidity could be a less costly alternative then widening the rates corridor, but recent communication does not suggest that the CBR is likely to act in this direction just now.

CBR under pressure to deliver bold policy response. As we expected, RUB’s adjustment to lower oil prices did not prove particularly orderly. The sharpness of the adjustment (5-7% daily moves) as well as the acute spike in volatility (above 40%) suggests market expectations de-anchored from fair value considerations, demanding policy action from the CBR.

Policy tightening via an increase in key policy rate.... We think the CBR is likely to raise the key policy rate another 150bp today. The growth-inflation trade-off argues for a milder lift off in rates, but in the current environment this is of secondary importance. And even from an inflation standpoint, the CBR will in any case have to revise its short-term inflation forecasts upwards, which might be used as a formal justification.

... and more significant stealth tightening. Given the speed at which RUB dropped, however, the market is unlikely to be impressed with anything less than 300-400bp (NDFs were pricing rates around 18% yesterday). In this environment, the CBR might as well go for non-conventional measures and lift the cap on the rates corridor (FX swap rates) more significantly, expanding the difference with the key rate to 300bp from 100bp now. Given seasonal liquidity patterns and REPO collateral constraints, short-term money market rates will be guided towards the FX swap rate, effectively bringing about more significant policy tightening, at least temporarily.

Dollar liquidity shortage is still an issue. For many reasons, the uptake of dollar liquidity from the recent USD REPO auctions was rather subdued, suggesting the CBR needs to be more pro-active in improving these facilities, especially in light of increasing signs that issues related to the shortage of dollar liquidity have started to resurface (the basis has again dipped well into the negative area). We believe there are many ways to address FX liquidity shortage in the banking system, from more active interventions in the FX swap market (targeting FX swap not far from RUONIA) to a forced dollar liquidity injection (dollar QE, deposits with large banks, etc.). We also think measures in this direction could constitute a major confidence booster and would be less costly for the real economy than widening the interest rate corridor or a RUB liquidity squeeze. That said, recent communications do not suggest the CBR considers this problem to be serious and might not be technically ready to roll out a big bazooka just yet.

Vladimir Kolychev
VTB Capital analyst


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