WOOD Flash – Russia macro: the end of the easing cycle, for now

At its meeting on Friday (12 February), the Board of Directors at the CBR decided to keep the policy rate unchanged, at 4.25%. The tone of the statement saw a substantial hawkish shift, following the mild hawkish messages of previous months, as the bank declared explicitly that further room for policy easing has been exhausted, and that it will now work towards determining a timeline for policy normalisation towards a neutral level, if future developments remain in line with the new forecasts. We were expecting a hawkish shift, but this turn, focusing on the neutral rate, is above our expectations. As a result, looking ahead, we do not expect further rate reductions and our base case is for the policy rate to remain unchanged at the current level for both this year and the next. Having said that, we do not fully dismiss the possibility of some tightening later this year, depending on even a temporary deterioration in prices, or if the severity or nature of potential sanctions could surprise to the upside. Nonetheless, we still keep our underlying view that inflation in Russia is on a multi-year downward trend, and that the current neutral rate of 5-6% is still too high for the 4% inflation target.