Why we expect a significant rate rise in Russia this week

Inflationary pressures in Russia are building and that's why we're expecting the country's central bank, the CBR, to make a 75 to 100 basis point hike to either 6.25 - 6.50% this Friday. That's towards the upper band suggested by previous guidance.

All that's illustrated by the charts below. Russian CPI spiked by 0.5ppt to 6.5% YoY in June, exceeding market consensus. The second shows banking sector data pointing to a decline in households' preferences to save. The third indicates that inflation expectations by households and corporates are continuing to climb on both supply and demand-side push factors.

The tightening cycle may continue afterwards, as near-term inflationary risk appears significant, with global CPI on the rise, the local labour market becoming tighter, cost inflation continuing, and credit demand increasing. We see the medium-term ceiling for the nominal key rate in the 6.50-7.00% range, which should be reflected in a somewhat less aggressive tone from the CBR commentary this Friday.

We see several factors limiting the key rate upside after 23 July:

• First, monetary inflation in Russia should moderate from September this year, or around 12 months after monetary supply growth had peaked, in line with historical sensitivity.
• Secondly, the risks in the food CPI segment seem to be stabilising thanks to global trends. We now see limited upside to our year-end CPI target of 5.7%.
• Thirdly, GDP growth prospects starting from the second half of this year appear less certain as the economy has reached pre-pandemic levels, outward tourism is reopening, while fiscal and monetary policy are becoming conservative and risks of a third wave of the pandemic are materialising.

According to the latest data, even though the vaccination rate in Russia improved in July, it is still at 22%, which is lower than the peer average of 34% (including 50%+ in the Czech Republic and Hungary), while the new infection rate is close to the second wave peak of 25 thousand per day and mortality is 700-800 per day, which is a historical high for the Covid pandemic locally (the second wave peak was in the 500-600 range). Finally, a 75-100 bp hike this Friday would lead to the ex-ante real key rate of above 2%, the upper border of the neutral policy stance, leaving some room for higher CPI expectations without the need to push the nominal rate higher.