Central Bank of Russia hikes key interest rate, additional hikes likely in coming quarters

The Russian central bank, hiked its key interest rate today for the first time since 2014 and has significantly tightened the press-release. The phrase regarding bringing the key rate to the neutral level in 2019 has disappeared from the press-release and the central bank guided for additional hikes ahead depending on external conditions.

The CBR decided to strongly demonstrate its commitment to inflation targeting avoiding possible Turkey-like scenarios. Even if the consensus and projection did not show any hike today, the money market was pricing-in a hike and the CBR decided not to disappoint the markets, noted Nordea Bank in a research report.

The Russian central bank upwardly revised inflation projection to 5-5.5 percent from above 4 percent for next year. The change in the projection could be seen as above the tolerance level, stated Nordea Bank. With inflation expectations still unanchored the central bank is inclined to be more hawkish.

After today’s decision, the RUB appreciated 1.5 percent against the USD. The current relatively solid levels are temporary and risks for the RUB are still skewed towards the downside. The major source of concern is still tougher sanctions rhetoric which is expected to increase in the months ahead. If the RUB pressure continues, more hikes are expected in the quarters ahead, stated Nordea Bank.