The Russian ruble is among the strongest currencies on Friday, boosted by the decision of the Central Bank of Russia (CBR) to raise the key rate by 50bps, above expectations. Analysts at Capital Economics think that a further 50bp of interest rate increases will be sufficient to lower inflation, but the risks are skewed towards a more aggressive tightening cycle.

Key Quotes:

“Russia’s central bank (CBR) hiked its policy rate by 50bp, to 5.00%, at today’s meeting and the accompanying statement strengthened the central bank’s hawkish message about the need for additional tightening to bring inflation back to target. We think that a further 50bp of rate increases will be sufficient to lower inflation, but the risks are skewed towards a more aggressive tightening cycle.”

“Additional 25bp interest rate hikes in June and in the second half of this year look nailed on, taking the policy rate to 5.50%. We think this will be enough to bring down inflation but there is uncertainty about how much further the central bank will need to go. The CBR is treading into unchartered waters as this is the first time, under Ms Nabiullina and the inflation targeting framework at the CBR, that monetary policy is moving from an ultra-accommodative stance to a neutral stance.”

“The need to tighten policy more aggressively will clearly depend on the emergence of new inflation shocks and the pace of disinflation in the second half of this year. The risks are skewed towards more aggressive tightening, stemming from further rises in commodity prices, looser fiscal policy and renewed sanctions that put the ruble under pressure. But as things stand, we think that investors’ expectations for a further 150bp of interest rate hikes by the end of next year are overdone.”

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