Russian central bank stays put on rates, says inflation risks remain elevated

Rate-setters in Moscow stayed put on interest rates at the end of the week and appeared to sound a tad less strident regarding inflationary risks and the possible need for more interest rate hikes.

The one-week auction rate, the monetary authority's main policy lever, was kept at 7.50%, as expected by the consensus.

In their statement released on Friday, policymakers said that "pro-inflationary risks remain elevated", whereas after their last policy meeting they had said that: "changes in external conditions observed since the previous meeting of the Board of Directors have significantly increased proinflationary risks."

Commenting on CBR's decision, William Jackson at Capital Economics said that, in overall terms, the statement was still 'hawkish'.

However, it also showed that September's hike was "intended" to be a one-off, with the appreciation in the rouble and decline in inflation expectations over the past month having played a role in the central bank's decision to dial-back on its more aggressive stance.

More important however had been the latest developments on the sanctions front, he said, with fears in that regard having "faded" since last month.

Indeed, ahead of September's CBR policy meeting, markets had begun to discount a "significant escalation in sanctions", the analyst explained.

Jackson added that while the US administration had been dragging its feet on imposing new sanctions all year long "it's difficult to predict how the situation will develop."

"Much depends on the outcome of the Mueller investigation and whether Russia will be deemed to have interfered in the US mid-term elections," he added.

Even so, the analyst predicted that: "Barring a significant escalation of sanctions and sharp fall in the ruble, the additional tightening being priced into markets is unlikely to materialise."

Regarding the risks to the outlook for inflation, CBR said: "Further yield growth in advanced economies, capital outflow from emerging markets together with geopolitical factors might lead to the amplification of volatility in the financial markets, and affect exchange rate and inflation expectations."

Nevertheless, just as on 14 September, the monetary authority continued to predict that annual inflation would peak in the first half of 2019 and be in a range of between 5.0% to 5.5% by end-2019, before slowing down to 4.0% in the front half of 2020.

According to the latest International Monetary Fund staff report, published on 12 September, on average consumer prices were projected to print at 2.9% in 2018 and 4.0% in 2019.

Also according to the latest IMF Article IV consultation, the rate of advance in the country's GDP price deflator, a broader measure of price pressures, was seen ebbing from a clip of 5.2% over 2017 and 2018 to 4.4% in 2019.

Nevertheless, analysts such as those at UniCredit Research had been predicting a rate hike at Friday's meeting, referencing expectations for the annual rate of CPI to rise to 6.0% towards the start of next year on the back of the increase in Value Added Tax scheduled for the start of 2019, which might unhinge inflation expectations.

On economic growth, CBR said it was close to potential, projecting a pace of expansion of 1.5%-2.0% in 2018, followed by a dip to 1.2%-1.7% in 2019, although "following years might see higher growth rates as the planned structural measures are implemented".

As an aside, Jackson's forecasts were calling for a 100 basis point reduction in the CBR's main policy rate to 6.50% by 2020.

Following the policy announcement, as of 1233 BST the US dollar was adding 0.34% to 65.8416 against the Russian rouble, while the US dollar spot index was advancing by 0.13% to 96.8080.

In the background meanwhile, front month Brent crude oil futures were lower by 0.839% to $76.25 a barrel on the ICE.