Page 95 - RusRPTAug21

2021e ROE and dividend potential (DY to rise from 4% in 2021e to 6.7% in 2025e).
8.2 Central Bank policy rate
The CBR’s Board decided to increase the key rate 100bp to 6.50% on July 23, extending Russia's lead in policy normalisation among large EMs. The decision came in broad agreement with the markets.
In recent history, single-step rate adjustments of this scale have been limited to the lockdown-countering reduction of June 2020 and aftershock policy normalisation in 1H15.
The CBR’s wording for upcoming meetings has become more dovish, as the Board said it would only ‘consider the necessity of further a key rate increase’ vs. the previous ‘this creates the necessity for further increases in the key rate at upcoming meetings’.
As part of its forward guidance framework (which is now the key component of the Board's signal), the CBR published the projected key rate path: the CBR’s projections guide for the key rate to average 6.5-7.1% in the remainder of 2021, 6.0-7.0% in 2022, and 5.0-6.0% in 2023.
A statement from the CBR said the decision was based on the updated macroeconomic forecast, which has been significantly revised.
“The growth of the Russian economy sped up in the second quarter, and inflationary pressure turned out to be higher and more persistent than forecast. Some sectors are already demonstrating signs of overheating,” said CBR governor Elvira Nabiullina, following a meeting of the bank’s board of directors.
According to Nabiullina, the rate increase is needed to bring inflation back to the target. Inflation reached 6.5% in annualised terms on July 29, which is considerably above target and close to five-year peaks. The steepest price increases in the second quarter of 2021 were for construction materials, furniture and cars.
In addition, inflation expectations have risen; the CBR has revised its inflation forecast upwards by one point to 5.7-6.2% for this year. After that, the CBR expects inflation to slow down to 4.0-4.5% in 2022 and remain close to 4%.
Nabiullina also noted that according to CBR estimates, economic growth sped up in Q2, with high-frequency indicators showing that the economy has bounced back to pre-crisis levels.
Artem Zaigrin, chief economist at Sova Capital said the rate increase was in line with consensus expectations.
“The decision was motivated by a faster-than-expected rebound in the Russian economy (CBR expects a growth of 4-4.5% y/y in 2021) combined with disruptions in global supply chains and imbalances in the labour market,”
95 RUSSIA Country Report August 2021 www.intellinews.com