Russian macro: The CBR - toward a “neutral”, albeit confusing monetary policy
The Russian Central bank raised its key policy rate by 25 bps last Friday. This move did not look necessary at this stage and for the time being it may be seen as relatively unimportant for the economy. What may be of greater importance is that the CBR clearly said that the key rate may go up further soon. Should that happen, the impact on the economy will be far greater.
In the minutes of its Board of Directors’ meeting the CBR blamed domestic reality, citing factors such as accelerated inflation and still-elevated inflationary expectations, as well as “faster than expected” recovery of domestic demand that “outpaces recovery trends in some production sectors,” as an explanation for the rate hike. Therefore, according to the CBR, monetary policy should transition toward being “neutral”, implying that it considers its current policy to be soft.
An increase of the key rate by 25 bps (and an almost inevitable follow-on move by RUONIA) will cost the budget about R14.5 bln of additional expenditure on debt servicing (including subsidies for mortgage loans). This sum is not critical for the budget, but if the Finance Ministry focuses on the issuance of floaters while the CBR continues to move the key rate higher, it may lead to much more serious changes.
* Recent CBR statements look a bit confusing and deserve additional comment. This year federal government spending is not going to exceed that of the last year as the 2020 federal budget expenditures exceeded R22.8 trln while the plan for the year 2021 is to spend around R20.6 trln (it can be supplemented by up to R0.8 trln, as the amended 2020 budget plan targeted but failed to fully allocate).
* Therefore, federal budget expenditures in nominal terms are unlikely to exceed the 2020 level, and in real terms they will be much lower than a year ago as inflation has accelerated since 4Q20 amid increased public spending.
* Having bounced back in the summer, the m-o-m growth of retail sales has decelerated, while manufacturing delivered better performance. Hence the statement that domestic demand is outpacing the production side needs additional verification.
* Overall, it appears that the CBR was looking backwards when referring to accelerated inflation, which was largely caused by the unprecedented budgetary spending in 4Q20. The effect of this spending has largely evaporated, and inflation is set to start slowing down in 2Q21.
* It has happened many times in the past that what the CBR announced doing as its forward-looking guidance never materialized as reality evolved faster than the CBR's thinking, and the regulator had to review its previous plans. Inflation may start going down faster in the coming months, and this may once again force the Central Bank to reconsider its intentions.
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