Russia Warns More Hikes May Be Coming After Rate Surprise
Bank of Russia Surprises With Bigger-Than-Expected Rate Hike
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Bank of Russia may have stunned bond and currency markets with the size of its rate hike on Friday, but entrenched inflation means traders shouldn’t assume the hawks are done.
“It’s too early to say the tightening cycle is over,” Governor Elvira Nabiullina told a press conference after lifting the main rate 75 basis points to 7.5%, the sixth straight hike and the biggest move since July. “The chances of the key rate rising and staying elevated for longer are higher than we had assumed in our last forecast.”
Only one economist in a survey of 44 made the correct prediction, with the rest forecasting an increase of between a quarter and a half percentage point. The central bank’s statement included higher predictions for inflation this year as well as the benchmark rate in 2022.
Read More: The Only Analyst to Predict Russia Rates Shock Now Sees a Hold
Unyielding price growth at home and internationally has forced Nabiullina to take bold moves, even as economic growth starts to slow. The central bank has now boosted rates by a total of 325 basis points this year in an effort to contain inflation, which is running nearly double its target.
New Covid-19 restrictions imposed this week will have a pro-inflationary effect because they do little to curb demand, Nabiullina said.
“Globally, inflation is becoming a bigger threat,” said Tatiana Orlova at Oxford Economics. “The language of the CBR statement is hawkish, and I wouldn’t be surprised if it had at least one more hike up its sleeve.”
Bank of Russia upped its rate forecasts for this year -- leaving open the possibility of a full-point hike at the next meeting in December -- and for 2022.
Bond yields surged and the ruble extended gains after the decision, advancing as much as 1.8% against the the dollar to 69.8150, its largest intraday rise since May 7. The currency trimmed the move to 0.9% by 4:35 p.m. in Moscow.
What Our Economists Say:
“We might have expected cautious guidance to accompany such a big hike. But the signal is more hawkish, leaving the door wide open to further tightening.”
--Scott Johnson, Bloomberg Economics.
RUSSIA REACT: Rate Surprise Sees Inflation Dominating Risks
Rate hike expectations along with recovering oil prices have helped make the ruble the best performer among major emerging markets so far this month.
The bigger-than-expected hike allowed Credit Agricole to book a 4.5% profit on a trade idea that saw it go long the ruble versus a basket of euros and dollars on Sept. 29. Friday’s rate move pushed the ruble past 70 per dollar, the level Credit Agricole was targeting in its trade, said Sébastien Barbé, head of EM research and strategy.
Inflation is still running near six-year highs as global price pressures add to local ones fueled by a delayed harvest. Even if some of those factors prove temporary, the central bank warned that they could feed into a lasting increase in inflationary expectations, which rose again in October to 13.6%.
After Brazil, Russia has been one of the most aggressive among emerging markets in raising rates to combat rising inflation this year. By contrast, Turkey this week surprised with a big cut, pushing the lira lower.
“The balance of risks for inflation is markedly tilted to the upside,” the central bank said its statement. “The Bank of Russia holds open the prospect of further key rate rises at its upcoming meetings.”
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