Russia: Further key rate hikes by CBR are temporarily off the table – Nordea Markets

Tatiana Evdokimova, analyst at Nordea Markets, suggests that in Russia, next Friday the CBR will meet for the first time since the VAT hike at the beginning of the year and as a result of improved global risk sentiment and stabilisation on the local financial markets, it seems that further key rate hikes are temporarily off the table.

Key Quotes

“The global markets have been through remarkable ups and downs since the latest CBR meeting 14 December when the key rate was increased by 25 bp to 7.75%. After a broad-based sell off on Christmas Eve, markets shrugged off pessimism and started 2019 on a relatively strong note.”

“Local financial markets are also in a better shape than a month and a half ago. RUB is 2% stronger despite CBR’s decision to resume not only regular but also postponed FX purchases. Russian country risk premium as measured by CDS has decreased from 146 to 129 points.”

“While external risks have temporarily diminished, internal inflationary risks are high but under control. The figures for the first four weeks of January show that prices have increased by 1%, bringing inflation in y/y terms to 5%.”

“The current picture is thus quite encouraging. Negative surprises may come from inflation expectations which are unanchored (currently at 10%) and may further deviate from the target in reaction to the VAT hike. While inflation expectations represent the key internal risk, geopolitics, oil price trends and EM currencies dynamics are the major external factors to watch. Geopolitical risks have temporarily become less acute and latest softer rhetoric from the Fed reduces EM risks. If either internal or external risks materialise, 1-2 key rate hikes may be merited in 2019.”