Russia: Central Bank Aims For Further Adjustment To Cope With Inflation

The Russian ruble is among the strongest currencies on Friday, boosted by the decision of the Central Bank of Russia (CBR) to raise the key rate by 50 bps, above expectations. Analysts at Capital Economics They think that another 50 bp of interest rate increases will be enough to reduce inflation, but the risks are skewed towards a more aggressive tightening cycle.

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“The central bank of Russia (CBR) raised its policy rate by 50 bps, to 5.00%, at today’s meeting and the accompanying statement strengthened the aggressive message from the central bank on the need for further adjustment to bring inflation down from return to the goal. We believe that another 50 bp of rate increases will be enough to reduce inflation, but the risks are skewed towards a more aggressive tightening cycle. “

“Additional hikes of 25 bp in interest rates in June and in the second half of this year look very nailed, taking the policy rate to 5.50%. We believe this will be enough to reduce inflation, but there is uncertainty about how much more the central bank needs to go. The CBR is treading unfamiliar waters as this is the first time, under Ms. Nabiullina and the inflation targeting framework at the CBR, that monetary policy is moving from an ultra-accommodative to a neutral stance. “

“The need to toughen policy more aggressively will clearly depend on the appearance of new inflationary shocks and the pace of disinflation in the second half of this year. The risks are tilted towards a more aggressive adjustment, derived from further increases in raw material prices, a more flexible fiscal policy and new sanctions that put pressure on the ruble. But as it stands, we believe investors’ expectations that interest rates will increase by an additional 150 bps by the end of next year are overblown. “