bne IntelliNews – Russian CBR rate rises 50bp to 5.5%, will continue to climb
The Board of Directors of the Central Bank of Russia (CBR) at the June 11 policy meeting decided to increase the key rate by 50 basis points (bps) to 5.5%, in line with expectations.
As reported by bne IntelliNews, only three months ago, the consensus expects policy rate to rise to 5.5% by year end. But the outlook quickly changed as inflation continued to rise. accelerate, reaching 6% in May and pushing the CBR to raise rates faster than expected – March (25 bp), April (50 bp) and June (50 bp) – bringing the key rate to 5.5% already in June. At the start of the year, rates were expected to rise by around 55bp in total, but analysts now estimate total hikes will be in the order of 125bp in 2021.
The movement was widely expected by the market, although a few analysts believed the rise could reach 75bp, which did not happen. And the regulator has forecast more rate hikes to come, as the balance of risks has remained skewed for inflation, according to the CBR.
“Today we have decided to raise the key rate by 50 basis points to 5.50% per annum,” CBR Governor Elvira Nabiullina said at a press conference after the announcement. “Inflationary pressures have increased markedly. This obliges us to continue to act actively to ensure price stability. We see the need for a further increase in the key rate at future meetings. “
Although the hike was expected, it represents a more aggressive CBR tightening policy. Previously in April Nabiullina opted for a rise in interest rates by “golden mean”, raising the rate from 50bp to 5%, more than expected, and achieving its second increase of the year against a background of rising inflation and geopolitical concerns that seem to have subsided since.
Nabiullina is now signaling her policy by wearing colorful brooches to the press conference. Last month she wore a golden ratio brooch – a curve drawn across the corners of squares that double in size that was famous in antiquity.
The golden mean represented a balanced path between the extremes. This month Nabiullina wore a leopard brooch that Russian observers scratched their heads on, but because of the governor’s love for literature and poetry, some have speculated that it was of an illusion in Rudyard Kipling’s story “How the Leopard Got His Spots” that indicates the CBR has adopted a new, tougher policy of tightening for the rest of the year. This month, the CBR and the Ministry of Finance have already clearly telegraphed a new monetary and fiscal tightening.
The CBR predicts that “given the stance of monetary policy, annual inflation will return to the Bank of Russia’s target in the second half of 2022 and remain close to 4%”.
Nabiullina went on to describe CBR’s perspective on developing the economy for the remainder of the year. Aside from high inflation, the rest of the economy is doing well.
“The Russian economy will return to pre-crisis levels this quarter. In the first half of the year, it is growing faster than we expected in the April forecast. Already, if one does not take into account the restrictions on oil production and international passenger transport, the output of most basic industries has not only returned to the level of late 2019, but has also exceeded it. Russia is among the group of countries that will be the first to reach pre-pandemic production levels, ”Nabiullina said.
The rebound has been so fast and so strong that some have already spoken of “overheating”. Nabiullina said demand exceeds supply and companies will need time to adjust, commission new facilities and hire new staff to close the production gap. Domestic growth is benefiting from the tailwind of a global recovery.
“At the same time, demand is increasing both domestically and abroad. Strengthening external demand is supported by a faster-than-expected recovery in the world economy and trade. The main reasons are a reduction in the risk of epidemics against the background of vaccination and extremely accommodating monetary and budgetary policies in the leading countries ”, declared Nabiullina.
“Aggregate demand is also affected by the increased growth rates in inventories of raw materials and components. First, companies compensate for declining inventory during a pandemic, during a time of supply chain disruption. Second, in light of the experience of the past year, companies are looking for higher inventory levels to protect against future supply disruptions and further price increases. This is not happening in a small group of products, but in a wide range of production chains, ”she added.
She also highlighted several lifestyle changes that have led to a boom in the mortgage market and a boom in sales of home electronics.
Since soft monetary expansion is not necessary to stimulate demand that is already ahead of supply, any further rate easing will only fuel inflation, argued Nabiullina, and accelerating demand. has already made itself visible in the surprise inflation rate of 6% in May.
“In May, the annual rate of price increase reached 6%, which is well above the target level. Current inflationary pressures have increased. Thus, the average monthly price increase over the last three months (from March to May), adjusted for seasonality, has reached a maximum since January 2016. Similar trends can be observed in other indicators of price dynamics. price that we are considering, ”said the governor.
She then detailed the difference between “cost inflation”, which Russia experienced last year, and “demand inflation”, which is what is currently pushing prices up.
“The fundamental difference between so-called cost inflation and demand inflation is how it affects physical volumes of consumption. In the event of cost inflation, i.e. a supply shock, prices rise, but consumers are forced to reduce their purchases in response. Firms are only able to partially shift their costs into prices because demand is limited. If prices and sales volumes increase (and this is exactly the picture we now see in very many market segments), it means that the expansion in demand covers more than the contribution of supply factors. . This means that we are dealing with demand inflation, ”Nabiullina said.