WOOD Flash – Russia macro: CBR sends hawkish signals, but the case for further cuts in 2021E is here

On Friday (18 December), the Bank of Russia maintained the key rate at 4.25%, keeping rates unchanged for the third meeting in a row. This was in line with the consensus and with what we flagged in our recent. The decision was influenced by the background of inflation acceleration inflation update above the CBR’s forecasts, which will end the year in a range of 4.6-4.9%, following the current trend. Furthermore, we saw material changes in the statement, now highlighting that disinflationary risks should not prevail in 2021E, together with changes in the wording that now hint at less likely interest rate cuts at the upcoming meetings. On the other hand, the Central Bank noted that the recovery of the Russian economy in the fourth quarter has stopped, and it is expected to continue only in 2021E as a function of COVID-19 normalisation. Albeit that both the statement and the press conference signal a much less dovish outlook ahead, we still expect rate cuts in 2021E, considering both temporary effects (such as the strengthening of the RUB) and structural trends (such as the permanent effects, leading lower inflation in Russia). Ultimately, we have revised up our 2021E eop forecast to 3.75%, from the current 3.00%. In this flash note, we have integrated our updated fair value models on the currency, the government bond yields and the financial market.