Russian macro: the CBR turns increasingly hawkish amid an overheating economy
On October 27, the CBR raised the key rate by a surprising 200 bps, which was well above market expectations (100 bps). The regulator explicitly mentioned that its monetary policy will remain tight, and the average annual key rate won’t change much in 2024. The CBR hinted that it may consider an even slightly higher policy rate for a short period, as it said that the average key rate would vary between 15.0% and 15.2% in November-December. The current key rate is 15%.
The spread between inflation and the key rate is quite high now (about 700 bps) and fully matches what the CBR calls a “neutral” policy rate. In the recent statement, published after Friday’s BoD meeting, the neutral rate estimate was revised up to the 6-7% range. However, one may see a lack of clarity or consistency in this statement. On one hand, the regulator believes that inflation will fall to 4% by the end of next year, which means that the key rate should go down to 10-11% by then—if we accept the aforementioned level of the neutral rate. On the other hand, the CBR suggests that the key rate will stay on average at 12.5-14.5% next year. The low boundary seems to be correct if we assume that inflation and the key rate will go down evenly in 2024: inflation to 4%, and the key rate to 10-11%. However, the upper boundary looks too high. It is not easy to imagine the mutually consistent trends between inflation (falling to 4%) and the key rate staying almost unchanged. The upper boundary would better match the current inflation level, which will be about 7.0% in October and is heading toward 7.5% or even higher by year-end. Therefore, one may expect some more surprising policy moves from the CBR next year.
All in all, the yield curve flattened in August and became inverted in mid-September. It inverted further at the end of October. The market seemingly priced in the key rate hike on October 27, but the move was quite limited in the long end of the curve. Generally, the it looks as though the market expects inflation to moderate and does not see further significant key rate hikes. If so, then the economy will gradually adjust to a higher interest rate environment. The interest rates on relatively long-term credits won’t rise much, which will only moderate economic growth but not hit it.
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