CBR Preview - CBR May Take Pause in Rate Hikes

The CBR will hold a regularly scheduled meeting on Friday. The emergency key rate hike to 20% on February 28 already seems to be taking effect. It has cooled down Russians' fevered demand for hard currency and durable goods, and it has boosted their propensity to save in spite of how high inflation has been running. Because of these factors, as well as the significant uncertainty with regard to the economic situation, we think the CBR may opt for a wait-and-see approach, leaving the key rate unchanged. However, we would not rule out an additional rate hike in order to increase the expected real return of ruble savings.CBR'S RECENT ACTIONS ALREADY TAKING EFFECTFollowing the emergency key rate hike to 20% and the tightening of capital controls, hard currency has started to return to the banking sector, suggesting that the CBR has managed to restore Russians' trust in ruble savings. The volume of cash in circulation has already dropped by around R0.4 trln since March 9 after surging to R2.7 trln over February 25-March 5. Consumer behavior also seems to be returning to normal. According to SberIndex data, consumer spending growth slowed from 25% y-o-y in the week ending March 6 to just 19.6% the following week (it ranged from 7-19% over January and most of February). The ruble has also recovered. After shooting up to USD/RUB 120 on the Moscow Exchange on March 9, the local currency has recovered to 108. Apart from the return of cash into the banking system, there are other signs pointing to an improvement in the domestic money market. Over the past few days, the CBR has cut back on its provision and absorption of liquidity through fixed-rate facilities. The volume of fixed-rate liquidity provision reached as high as R7 trln at the peak but has already returned to less than R1 trln. The volume of liquidity absorbed through fixed-rate facilities has fallen from a peak of around R3 trln to R1.6 trln.WE EXPECT RATES TO BE KEPT ON HOLD, BUT RISKS OF HIKE ARE SIGNIFICANTIn our view, for the CBR the main role of the key rate in the current environment is maintaining financial stability. From this standpoint, we think the sharp rate hike on February 28 should be enough for the time being. For this reason, given the lack of certainty with regard to the external backdrop for the Russian economy, we think the CBR could refrain from taking further action on Friday. On the other hand, the State Statistics Service reported inflation of 2.2% in the week ending March 4, which is one of the highest weekly readings on record. Russian Economy Minister Maxim Reshetnikov indicated not long ago that it would make sense for the government to maintain as much flexibility as possible with regard to prices. If the problems along the supply chain become worse, inflation will likely remain elevated. With this in mind, the CBR could decide to go ahead with a proactive further rate hike on Friday if it thinks the real interest rates on deposits will not be enough to encourage Russians to hold on to their ruble savings over the next few months. In any case, if the CBR chooses not to hike this time around, we would expect it to indicate that it is ready to hike at the next meeting in April if need be. The press release is due at 13:30 Moscow time, while CBR Governor Elvira Nabiullina is scheduled to deliver remarks on monetary policy at 15:00. Unlike the meetings in recent years, there will not be a press conference after Friday's meeting.