News & Analysis

Going into today’s event, the ruble was trading moderately stronger as markets were expecting the Central Bank of Russia to hike interest rates by 100bps, although some saw risks of a 75bps hike in line with softening inflation pressures in December.

Their decision to go ahead with the 100bps hike to increase the key rate to 8.50% provided some upside to the ruble, but gains were limited as this was largely expected by markets and risks around stricter sanctions linger.

The CBR acknowledged that inflation is developing above their October forecast, and stated CPI risks are markedly tilted to the upside despite December’s figure expected to come in slightly lower at 8.1% vs 8.4% previously. Inflationary pressure from the labour market has intensified as well, according to the bank, which leads the CBR to believe inflation could deviate from the target in both a more substantial and prolonged manner.

The Bank of Russia has been fairly responsive to inflation throughout the past nine months with 325bps of hikes so far this year, which meant the ruble was relatively shielded from the broad USD strength stemming from more hawkish expectations of the Fed. Along with Brazil, Russia was the first to hike interest rates in Q1 this year.

While today’s substantial rate hike failed to persuade investors sufficiently for the ruble to strengthen, the CBR’s commitment to fight inflation and keep the tightening cycle running means the monetary and inflation outlook may not be the biggest concern for the ruble as markets view the CBR as credible on balance.

Instead, the return of looming sanction risks has now become an increased threat for Russia. The US and Britain had already agreed to impose further economic sanctions on Russia if the Russian military invaded Ukraine, and since Thursday, the European Union has joined them after Washington increased pressure on Brussels. The result of such sanctions, especially if levied on capital markets, is likely to be substantial RUB depreciation, which will only make the CBR’s job of tackling inflation harder. The central bank may not be done with hiking rates by large multiples just yet if this scenario plays out.

 

EURRUB largely unmoved after 100bp rate hike by CBR

 

Author: Ima Sammani, FX Market Analyst

 

 

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