Russian Macro: The Central Bank Turning Increasingly Hawkish
On December 17, the Central Bank of Russia raised its key rate by 100 bps to 8.5% and mentioned that a further rate hike could be possible in mid-February if inflation expectations remain high and inflation itself stays elevated. The regulator one more time referred to its previous views suggesting that inflation expectations are still high, the demand growth outpaces the rate the supply side can produce goods and services, limited incentives to save, etc. The CBR also mentioned that, as of mid-December, inflation fell to 8.1% y-o-y from 8.4% seen in November but still could not resist the temptation to hike the key rate.
It looks as though despite the expected spending spree from the federal budget in December its impact on inflation will be rather limited as social expenditures that significantly increased in 3Q21 ahead of the September Duma elections, already subsided and are going to be much lower in December and in the months to come in 2022. Additional social spending was most inflationary among other categories of the budgetary spending. As in 2022 social expenditures will contract relative to 2021, it will help Russia to slow inflation down. The CBR’s arguments about high inflation potential do not look convincing from this point of view. While referring to Russia’s ongoing economic recovery, the CBR mentioned that seems to be faster than was expected and it was another argument in favor of the key rate hike. So far, the officially published statistics have not pointed to accelerating trends.
--- CBR now expects GDP to grow by 4.5% in 2021 as, according to its estimates, the 4Q21 GDP is growing at a faster pace than the 3Q21 GDP was, albeit more moderately than the pace in 2Q21. No reference was made either to seasonally adjusted q-o-q growth or y-o-y numbers.
--- Statistics, doesn’t support such a view. In order to move from the currently reported 4.6% y-o-y GDP growth in 9M21 and 4.3% y-o-y in 3Q21 to the 4.5% annual number, the 4Q21 GDP should rise by around 4.1% y-o-y. It will mean a decelerating quarterly growth measured y-o-y.
--- Seasonally adjusted quarterly GDP numbers as published by Rosstat, indicate that Russia’s GDP grew by 3.2% q-o-q in 2Q21. In 3Q21, the seasonally adjusted GDP contracted by 0.8% q-o-q. If to assume that the CBR referred to seasonally adjusted GDP numbers, while mentioning that q-o-q growth in 4Q21 looks slower than in 2Q21, then making simple calculations one can conclude that, to reach the 4.5% annual GDP growth this year, the 4Q21 q-o-q seasonally adjusted growth should be 4.0%, i.e., faster than in 2Q21, therefore contradicting the CBR statement.
--- These confusing growth numbers could mean that the economic recovery in Russia doesn’t look that great as was suggested by the CBR's. Hence its recent decision to increase the key rate 100 bps does not look well justified.
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