Page 101 - RusRPTNov21

Sova Capital also sees the critical message from the CBR’s statement is that it "is ready to bring inflation down to 4-4.5% y/y by 2021, which is in line with our current forecasts. In our view, this could mean that CBR needs to hike the key rate to more than 8% at its upcoming meetings".
More hikes to be expected
"The readings from the updated mid-term forecasts imply that CBR reserves the option to hike the key rate to 8.5% in 1Q21," Sova argues.
Aton analysts believe that further key interest rate increases by the end of 2021 are likely, warning against the traditional hike of budget spending towards the year of the end, which could bring additional inflationary pressures.
Bloomberg reminds that after Brazil, Russia has been one of the most aggressive among emerging markets in raising rates to combat rising inflation this year. In the meantime, Turkey this week surprised with a big cut, pushing the Turkish lira lower.
At the press conference of the CBR following the policy rate decision, Nabiullina attributed the inflation to persistently high inflationary expectations and still disrupted supply chains making supply lag behind demand. As such, given limited supply, the growth in demand does not translate into growth in consumption, but fuel price growth.
In the meantime, Nabiullina dismissed the arguments that lockdowns could help tame inflation. The head of the CBR sees it as a pro-inflationary factor, since this may be accompanied by a reduction in supply (due to a halt in production), rather than in demand.
Higher interest rates to support ruble
On October 22 the ruble extended its recent gains after the CBR decision, advancing by as much as 1.8% against the US dollar to RUB69.82, marking a largest intraday rise since May 7. The Russian currency has been rising on the expectations of more rate increases and growing oil prices.
Otkritie Bank argues that higher key interest would lead to increased ruble volatility in 2022-2023, as high interest rates will maintain inflows to the money market and OFZ federal ruble bonds.
However, while the ruble will strengthen on high oil and gas prices, a higher inflow of non-resident investors to the OFZ market will increase the currency's sensitivity to geopolitical shocks, which could eventually lead to a downwards correction in 2022-2023, Otkritie warns.
Analysts surveyed by The Bell also believe that toughening of the monetary policy and higher guidance for the key interest rate is positive for the ruble in the short to medium term. The higher the key interest rate, the more attractive fixed income instruments will become vis-a-vis the equity market, they believe. In the short term, Russian equity is still seen as supported by high commodity prices, quantitative easing in the US and the EU, and a rise in global equity indices.
The CBR’s full monetary report for the rate decisions for October can be
101 RUSSIA Country Report November 2021 www.intellinews.com