Russia: Central bank to remain on hold but inflation readings are now critical – MUFG

The Central Bank of Russia will have its monetary policy meeting on Friday. Analysts at MUFG Bank see the central bank keeping rates on hold but they warn upside inflation surprises could present challenges.

Key Quotes:

“The Central Bank of Russia (CBR) is expected to keep rates unchanged at 4.25%. Inflation in February increased more-than-expected from 5.2% y/y to 5.7% y/y, opening the door for the CBR to hike in the coming months despite our assessment that mid-term disinflationary factors will drive inflation below the target.”

“While we think the CBR is willing to tolerate a transient “overshoot”, conditional that it has the confidence that inflation will change direction soon, it is more likely to react to inflation being significantly above target for an extended period.”

“The forward guidance post-meeting this week will be critical to gauge as to whether the CBR will follow its recent stance on deliberating on how swift the normalisation of monetary policy should occur.”

“We continue to look for a cut in Q4 2021 which is conditional on inflation falling below the CBR’s 4% target, with the main risk being looser-than-expected fiscal policy and geopolitical risks.”