Rates Weekly - April 27, 2021

> Ruble liquidity: Liquidity glut to disappear and O/N rates to rise ahead of long holidays. Last week, banks had accumulated a significant liquidity glut ahead of what turned out to be a 50 bp rate hike by the CBR. Against this backdrop, this week O/N rates remained low relative to the key rate despite high tax payments. Looking ahead, over the next week this excess liquidity should disappear as banks place it on weekly deposit with the CBR. We would thus expect O/N rates to rise to 4.90-5.00%, as banks won't have excess liquidity while demand for it could intensify due to growing cash in circulation ahead of long holidays declared in Russia starting next week.> OFZs and rates: Bear-flattening in wake of Friday's CBR meeting. The CBR's decision to raise rates by 50 bps last Friday has led to bear-flattening along ruble rate curves, with market participants pricing in a more front-loaded tightening of policy by the CBR. The longer end has shown more resilience, as many see the CBR's decisive action as reducing the longer-term inflation risks. Also positive for longer durations, the CBR's newly published key rate forecast implies that the average key rate is likely to be no higher than 6.3% in 2022 and 6.0% in 2023, which means that the CBR still sees the neutral range for the key rate at 5-6% in nominal terms. We expect the CBR to deliver another 50 bp rate hike in June, as we think it would prefer not to drag out policy normalization based on its recent rhetoric and given the persisting pro-inflationary risks. We therefore think ruble rate curves will continue to flatten.