WOOD Flash – Russia macro: CBR moves quickly to insure against prospective sanctions

The Bank Board at the CBR raised the policy rate by 25bps, to 4.50%, at its meeting on Friday (19 March), above both our and the market’s expectations. Nonetheless, the move broadly reinforces our view and remains in line with our underlying assessment: that the bank will prefer to front-load rate hikes, which should help it position better to counter the potential threat of sanctions. As we argued in our 11 March flash note, the US tone on sanctions is deteriorating quickly and the target seems to be Russian sovereign debt in RUB. The improved macro outlook, as the good soft macro data in 2021E so far suggest, also offers additional space for the CBR. At this point, however, we believe that the bank will not actively aim to reach the top of the neutral range (5-6%), while it may still retain the rhetoric to facilitate a drop in inflation expectations. However, considering the early move, it is increasingly likely that the policy rate will be raised to around the lower bound of the stated neutral range already this year – 5%, or an additional 50bps of hikes. We have updated our fair value models for the USD/RUB and the 10-year yields for the new assessment. In our fair value assessment, the increase in yields at the top of the neutral range (6.0%) would offer 3% upside for the USD/RUB, compared to the scenario that sees the CBR stopping at the bottom of the neutral range.