GRAPHIC-Politics, inflation, new models: Five questions for Russia’s central bank

PUBLISHED: Thu, 22 Apr 2021 09:45:12 GMT

By Karin Strohecker and Katya Golubkova

LONDON, April 22 (Reuters) – Russia’s central bank will meet on Friday to set interest rates with more than one third of analysts now expecting inflation pressures and rising geopolitical tensions to prompt policymakers into a 50 basis point rate hike.

About two thirds of analysts are sticking to earlier forecasts of a 25 bps rate hike to 4.75%.

Here are some key questions being asked by markets:


Russian markets are no strangers to geopolitics, but Washington’s latest sanctions targeting local sovereign debt send a message about what options are on the table and more might come.

There is no shortage of potential triggers. Tensions are rising between Moscow and Western countries alarmed by opposition leader Alexei Navalny’s worsening condition and the massing of tens of thousands of Russian troops near Ukraine and annexed Crimea. Meanwhile Russians have taken to the streets in a nationwide protest in support of Navalny.

Latest sanctions sparked some short-lived turmoil but also prompted banks such as Morgan Stanley to revise up rate hike forecasts.

“The new sanctions do not threaten Russia’s financial stability, but we think that the CBR would want to give extra support to the market,” said Morgan Stanley’s Alina Slyusarchuk.


A weaker rouble during parts of 2020 and pandemic-related supply disruptions have pushed Russian inflation higher in recent months. Even with a hiking cycle underway, inflation is seen topping Russia’s 4% target throughout 2021.

In a speech on Wednesday, Russian President Vladimir Putin said financial authorities must maintain macroeconomic stability and restrain inflation.

While inflation risks remain elevated, many analysts expect Russia might have seen price pressures peak already.

“CBR is a cautious central bank which quickly shifts its stance to stay ahead of the market. This is the main supportive factor for the rouble,” said Ivan Tchakarov at Citi.


For the first ever time, the central bank will publish its expectations for the trajectory of the policy rate.

Although details on just how are scant, rhetoric from the central bank suggests this will not be a Fed-like dot plot or a pure model outlook analogous to that of South Africa’s central bank.

Instead, the interest rate trajectory will reflect a range of model simulations and scenarios discussed during the MPC meetings – perhaps in form of a fan chart.

“We anticipate such fan charts to demonstrate front-loaded rate normalisation, in line with the CBR’s latest communication,” said Ehsan Khoman at MUFG.


Local sovereign bond yields spiked to 7.4% in early April – levels last seen in the midst of the pandemic rout a year ago.

Russia’s central bank is prohibited from buying OFZs directly on the primary market, but it can provide banks with liquidity to increase such purchases. Three state-controlled banks, Sberbank, VTB and Otkritie, hold a total of over 4 trillion roubles or around a third of all OFZs.

There is some focus on how the central bank might tweak access to liquidity after introducing monthly one-month and one-year repo auctions last May to provide banks with options, including for additional OFZ purchases.

The central bank can buy OFZs on the secondary market and support the prices in case of severe volatility but has called such a step “a last resort option”.


Russia’s economy shrank 3.1% last year. The central bank forecasts a 3.0-4.0% recovery this year followed by a slowdown over the subsequent two years.

A more aggressive increase in borrowing costs would risk restraining the fledgling recovery, while data on how supply and demand are shaping up paint a mixed picture since Russia started to relax lockdown measures in January.

“Monthly indicators for March show an improvement on the supply side relative to February,” said Clemens Grafe at Goldman Sachs. “By contrast the demand side indicators were mixed.”

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(Reporting by Karin Strohecker in London and Katya Golubkova in Moscow, additional reporting by Elena Fabrichnaya in Moscow; Editing by Catherine Evans)

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