WOOD Flash – Russia macro: CBR rushes to neutral range as inflation starts decelerating

The bank board at the CBR decided to raise the key rate by 50bps, to 5.00%, at its meeting on Friday (23 April), the bottom of the neutral range, assessed as between 5-6%. This is 25bps above the consensus, but in line with what we have been flagging recently. The annualised core inflation numbers remain elevated and, this, together with different elements, such as the US sanctions, relatively good GDP growth numbers, and the mild fiscal easing announced, has allowed the CBR to transition faster towards the neutral rate. Inflation dynamics alone do not explain the fast switch to a tighter monetary policy stance in the past two months and, we keep our view that this was a proactive protective move, to hedge against further deteriorations on the sanctions front. In the past few days, we have seen timid signals of a potential de-escalation (e.g., the announced meeting later this year between Putin and Biden, and the withdrawal of Russian troops at the border with Ukraine). We do not believe that this is an inflection point but, if this trend continues in the coming months, we expect the CBR to slow the pace of tightening at the coming meetings, so that it will be consistent with an average annual key rate value of 4.8%, the lower bound of the new released framework. Regarding currency and yields, our updated model signals a fair value of 73.7 in USD/RUB and 6.9% in 2021E.