Page 109 - RusRPTApr21

inflation from feeding through into higher inflation expectations which have been rising by tightening monetary policy decisively.
The Bank appears to have been caught off-guard as it hadn’t signaled the upcoming tightening and had only announced the end of the easing cycle at its February meeting. The sharp rise in US term premia must have played a role. As US bond yields rose by 60bps since late February, the market-implied policy rate for Russia has increased by over 80bps, with markets now pricing in another 110bps in policy rate hikes in the next six months.
The tone of CBR’s statement was hawkish (governor Nabiullina even wore a hawk brooch to the press conference), with CBR admitting there could be more hikes at upcoming meetings.
Capital Economics now expect a 25bp rate hike at each of the meetings in April and June, and a further 25bp in the second half of the year, taking the policy rate to 5.25% by year-end. Others believe the rate hikes will end at 5- 5.5%.
§ Consumer inflation reached 5.8% as of mid-March, which is higher than CBR’s forecast. Inflation processes are significantly above CBR’s target level of 4% YoY, although inflation is expected to start falling this month before returning to 4% by 2H22. The inflation expectations of both households and enterprises have been elevated since the start of COVID-19.
§ The demand recovery has surpassed CBR’s expectations, with more enterprises seeing their output return to pre-COVID-19 levels and consumer-related business performance improving as restrictions are lifted. The post-COVID-19 disruptions in supply chains should lead to cost-push pressures on inflation.
§ External demand is set to improve following the global rebound, mass vaccinations and additional fiscal stimuli that could support Russian exports. The efficiency of vaccines against new COVID- 19 strains, the pace of the economy’s reopening and the fiscal consolidation will all determine the mid-term outlook.
§ Financial conditions remain accommodative, in CBR’s view. Short- term OFZ yields have risen on expectations of a steeper key rate trajectory, while mid/long-term yields have risen on the back of increasing global benchmark rates. Subsidized lending programs are still providing tailwinds to the economy.
§ Pro-inflation risks dominate the outlook. Short-term risks consist of elevated volatility on financial markets due to higher interest rates in the face of a more buoyant global recovery; geopolitical risks;
109 RUSSIA Country Report April 2021 www.intellinews.com