CBR’s hike and August CPI imply a key rate higher than 7%

RUSSIA ENERGY / FINANCE - In Brief 10 Sep 2021 by Marcel Salikhov
The CBR continued its tightening cycle and raised the key rate for the fifth time today. This time it was 25 bp, up to 6.75%, against a consensus forecast of +50 bp. While the press release about the decision was relatively dovish, CBR Governor Elvira Nabiullina indicated that the key rate might increase above 7% during the press conference, and her overall stance was more hawkish than previously. So despite a smaller hike than anticipated, CBR is leaning toward a more hawkish mood.August CPI published this week was pretty dismal. CPI was 0.17 m-o-m, driven mainly by food prices (fruits & meat prices). Gasoline prices accelerated while there was cooling in construction material prices. We believe that inflation will accelerate, driven by seasonal factors and additional social payments in September 2021. Extra payments (~$140 to every pensioner and ~170/person to military personnel) announced by V. Putin in August 2021 might contribute 0.2-0.4 p.p to 2021 inflation. Current real-time data imply that most of the payments contribute to extra consumption.According to the CBR's latest medium-term forecast, published in July, inflation will be in the range of 5.7-6.2% by the end of 2021. Even at the higher range, this forecast looks very optimistic. So the CBR will probably revise its forecast higher at its next meeting. A more hawkish CBR mood is beneficial for the RUB. However, despite favorable factors over the last few months, the RUB failed to appreciate as demand for FX both from exporters and the general public remains strong. Chart 1. CBR's policy rates and money market rates, Jan 1, 2020 - Sep 9, 2021Chart 2. Contribution by major groups to annual CPI, January 2031 ...

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