Ruble weakness following the latest round of US sanctions makes a large rate hike in December very likely. This Friday, Russia’s central bank (CBR) is expected to hike its key rate by 200bp to 23.0%, Commerzbank’s FX analyst Tatha Ghose notes.
CBR set to continue hiking rates
“Since our earlier assessment, inflation has significantly accelerated because of a food price spike across the region and also because of FX pass-through, with seasonally-adjusted inflation reaching 15%-16% (annualized), while even the regular year-on-year inflation figure has reached near 10%. Given CBR’s orthodox, uncompromising attitude, a large rate hike has to be the base-case.”
“Some think that higher interest rates will not solve any problem at this current juncture because of the ‘war-time’ structure of economic demand, with prioritized state activities being simply inelastic to interest rates. What is more, the FinMin has recently taken steps to reduce interest rate subsidies on corporate lending, which had earlier been a prominent counter to higher interest rates. Finally, in recent months, we can observe sharp deceleration in household lending and also some deceleration in corporate lending beginning November.”
“In our view, CBR will continue to hike rates regardless of such opposing arguments. We do not anticipate a reversal of Ruble depreciation as a consequence of monetary tightening. The exchange rates we observe today are technical fixes, with only weak links to interest rates or other fundamentals at this point.”
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