The CBR has chosen to accelerate rate hikes

RUSSIA ECONOMICS - In Brief 23 Apr 2021 by Alexander Kudrin
The CBR raised the key by 50 bps to 5.0% and explained it by the need to contain inflation expectations, which according to the CBR, remain elevated. The regulator also mentioned that the domestic economy is recovering faster than was anticipated - on the back of strengthening domestic demand to a great extent. GKEM Analytica previously wrote that the November-December 2020 federal budget spending spree was the main reason behind it, and the recovery Q-o-Q will moderate going forward. Due to base effects, Y-o-Y growth will strengthen in 2Q21 and 3Q21, however. Global economic growth recently got an additional push from the US stimulus supported global economic growth, which pulled up commodity prices. Therefore, the CBR had to revise up some of its forecasts, such as the balance of payments, inflation. Hence, the policy rate had to go up faster. Among factors that encouraged the CBR to tighten its policy, the regulator mentioned elevated geopolitical risks.Interestingly, the CBR mentioned that earlier, it expected inflation reaching reach the peak in 1Q21 and then to start falling. Now, the CBR expects inflation to remain generally flat for some time before it can begin falling at year-end. That is what GKEM Analytica anticipated earlier. Inflation y-o-y had to say flat for a few months as it was relatively low from May to September 2020. In those five months, it cumulatively reached 0.8% only (which a low level for Russia) after jumping by the same 0.8% m-o-m in April 2020 alone. There was no way inflation could start steadily decelerate from 2Q21.On top of that, the CBR announced its medium-term outlook for the key rate. The regulator expects the average annual key r...

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