Russia’s central bank (CBR) has always been a credible and prudent central bank in the emerging market world. Its past decisions when the CB hiked rates right after government figures demanded rate cuts from time to time (CBR would need to reverse the FX volatility which resulted from such government demand) where always admired. Impeccable credentials notwithstanding, CBR might be overdoing monetary tightening, Commerzbank’s FX analyst Tatha Ghose notes.
RUB isn’t affected by interest rate decisions
“CBR hiked its key rate by 200bp to 21.0% on Friday. This was within range of estimates, but the majority of analysts had predicted only 100bp. What is more, the central bank maintained extra-hawkish language going into its 20 December meeting, clearly signalling the possibility of another hike then. This possibility was further backed up by upward revision to the bank’s official key rate forecasts for the coming years. CBR officially delayed its timeframe for achieving the inflation target from 2025 to 2026. One of the main reasons for this changed outlook is, supposedly, above-trend economic growth.”
“This picture begins to make less sense now. A lot of this growth is sectorally unbalanced, with continuing shrinkage of the private sector in favour of state commodity, energy and wartime production. These latter sectors are being strategically pushed at the moment and defence, for example, has access to capital from the government directly, therefore immune to CBR’s interest rate hikes. Most private forecasters and institutions anyway see GDP growth decelerating to the 1.5% range next year from c.3.5% this year.”
“Is CBR’s reaction function truly proportionate to the inflation problem at hand? We could always argue that a prudent central bank should choose to keep interest rates arbitrarily high until any inflation overshoot has been stamped out. But somehow, given the background of inflation in present-day Russia, this argument for raising rates seems less compelling. The USD/RUB and EUR/RUB technical fixes are not affected by interest rate decisions these days. USD/RUB was trading at around 96.48 before the announcement and, in fact, ended the day higher at 97.35 despite all the hawkish development.”
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