The CBR pulls the key rate higher, but is likely to stay on hold going forward

RUSSIA ECONOMICS - In Brief 26 Jul 2021 by Alexander Kudrin

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The Russian Central bank raised its key rate by 100 bps to 6.5%, i.e., to the level of the current y-o-y inflation. Annualized 3M or 6M moving average, however, is much higher. Though, it will come down fast in 4Q21. The CBR referred to elevated inflationary expectations, identified its monetary policy as “soft.” The regulator also referred to a rapid growth in domestic credit that helps to increase the domestic demand more than the domestic producers may respond. Hence high inflation, i.e., well above the 4.0% medium-term target. The CBR expects the economy to grow by 4.0-4.5% this year amid OPEC+ decision to expand the oil production, while inflation may stay within the range from 5.7-6.2%. The CBR admitted that inflation in July started to decelerate. GKEM Analytica believes that the upper boundary looks unlikely, and inflation can fall below the CBR lower boundary by year-end. The economy may indeed grow above 4% this year, as almost every month Rosstat revises up some of the statistical indicators published earlier.Note that last time the key rate was at a 6.5% level in November 2019 while inflation y-o-y was at 3.4%, implying that a high real key rate is not new for the Russian economy. Meanwhile, the key rate was even higher in the previous years. It now looks likely that the CBR will stay on hold with its key rate as in 3Q21 y-o-y inflation will remain relatively stable, while annualized 3M or 6M moving average inflation will start falling rapidly. The key rate will turn positive in real terms very soon.At the end of July will publish banking survey statistics as of July 1, and it will be possible to see whether previous rate hikes had an impact on credit growt...