News & Analysis

After the Kremlin’s war on Ukraine and the resulting implementation of sanctions from the West saw the Central Bank of Russia hike rates from 9.5 to 20%, the consensus for today’s meeting was for rates to be held. This ultimately transpired. Given the lack of policy changes, the rate statement instead provided more of an economic update.

The Bank of Russia will, according to today’s statement, take into account actual and expected inflation movements relative to the target and economic developments over the forecast horizon. At the moment, these inflation expectations have gone through the roof as the sanctions put enormous pressure on the Russian economy, which is something Governor Nabiullina didn’t sugarcoat in the statement. The statement was more descriptive than forward looking, which makes sense given the uncertain outlook.

The Bank of Russia sees GDP falling in the next few quarters,  while it states higher inflation is inevitable but temporary. The decline in GDP will mainly be driven by supply disruptions, thereby producing a limited disinflationary effect.

Inflationary risks have increased and are pronounced over the entire forecasting horizon, although this will be most prominent in the short-term. Over the longer-term, Russia’s economy still faces high levels of uncertainty regarding the scale and speed of the recovery of supply in response to the sanctions.

Hours before the announcement, Vladimir Putin proposed a third term as the head of the CBR for Nabiullina, according to a document published on the Lower House of Parliament’s website.  Given the current hostile environment, it is unlikely her reappointment would make any significant difference for Russian assets as long as the war continues and sanctions continue to restrict the flow of cross-border capital, even though her reputation amongst foreign investors is exemplary. Nabiullina is set to speak at 14:00 GMT, however no Q&A will follow after her statement this time around. More focus will be on whether she will formally announce a resignation, after headlines raised speculations on the matter. A confirmation of her resignation would signal a deepening crisis and would leave the Russian economy without a familiar face at the helm during the storm.

 

 

Authors: 
Ima Sammani, FX Market Analyst

 

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