Lars Christensen
Danske Bank A/S
The Russian central bank (CBR) today in an unexpected move hiked its key policy rate by 50bp to 8.0%. The consensus expectation was for no change.
The hike undoubtedly has to be seen in the light of the renewed sell-off in the rouble over the past week.
The CBR is clearly concerned about the inflationary consequences of the weakening of the rouble, but is likely to be under political pressure to curb the sell-off in the rouble.
Overall, we doubt the hike will do much to stop the continued weakening of the rouble as long as geopolitical risks remain high and as long as the EU and the US are likely to step up further sanctions against Russia.
The hike, which is the third for the CBR this year, is likely to put further downward pressure on Russian domestic demand. In our view, Russia is essentially already in recession and the hike will just makes matter worse for the economy, which is already suffering from significant currency outflow in relation to the crisis.
To reiterate our key view: it is likely to get worse before it gets better; therefore, more rouble weakness should be expected, the Russian economy is likely to fall deeper into recession and we maintain our underweight recommendation in our EM Bond Snapshot portfolio.
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