Russian Rate Hikes Coming as Morgan Stanley Joins Chorus


Pressure is building on Russian central bank Governor Elvira Nabiullina to fire the starting gun on tighter monetary policy.

The country’s first rate hike in more than two years likely won’t come at Friday’s meeting. But soaring food prices and a currency weakened by the threat of international sanctions have driven inflation to the fastest pace in four years, putting Nabiullina in line to become one of the first central bankers globally to tighten in the months ahead.

Morgan Stanley and Citigroup Inc. warned last week that the chances of a hike are increasing after the higher-than-expected inflation print on March 5. Since the numbers were released, derivatives traders more than doubled their expectations for interest-rate increases in the coming three months. Ten-year ruble bond yields are testing their highest levels in a year.

Russian Rate Hikes Coming as Morgan Stanley Joins Chorus

“The market is forcing its short-term concerns on the central bank, which will struggle to ignore it,” said Viktor Szabo, who helps manage $560 billion at Aberdeen asset management in London. The first hike could come as early as Friday’s meeting, he said, but April is more likely and will depend on revised data for gross domestic product growth, due at the start of the month.

All but one of the 33 economists surveyed by Bloomberg see Bank of Russia keeping interest rates on hold at 4.25%. Forward-rate agreements are pointing to 38 basis points of increases over the next three months.

As the global economy recovers from the pandemic and developed-market investors guess at the potential scope of price pressure, inflation is picking up in some emerging nations, making a more hawkish policy response all but inevitable. Turkey is forecast to lift rates on Thursday and South Africa and the Czech Republic are seen following suit later this year.

What Our Economists Say:

“The tide is turning for emerging-market central banks. In 2020, they embarked on extraordinary easing, cutting rates by a record amount and engaging in asset purchases. This year, most are becoming more hawkish.”

-- Ziad Daoud, Bloomberg Economics

In Russia, price growth has become a political issue after President Vladimir Putin ordered the government to cap the cost of key foods late last year. The inflation rate came in at 5.7% in February, versus a forecast of 5.5%.

An additional inflationary spur has come from the ongoing sanctions pressure that’s kept the ruble weak compared with peers, despite rebounding oil prices.

RUSSIA INSIGHT: Ruble Left Behind by Oil as Sanctions Loom

In an interview with local media on Friday, Nabiullina said the bank may shift as soon as this year to a neutral policy -- one that neither stokes nor slows inflation -- implying at least 75 basis points of hikes.

As the meeting nears, Russian bond investors have plenty of factors to weigh. With U.S. Treasury yields climbing and the Russian Finance Ministry planning to cut its borrowing target, they’re split on where value lies along the local curve.

VTB Capital’s Maxim Korovin and Petr Grintser prefer longer-maturity ruble bonds, which they say have sold off too far and stand to gain even if the central bank were to eventually lift rates to 5%. Meanwhile, Raiffeisen Capital’s Stanislav Tokuda is betting on safety in the short end and CPI-linked notes, given the surge in inflation.

Russia’s ten-year ruble bonds were little changed on Monday with the yield one basis point lower at 6.78% after a 14 basis-point surge in the previous three sessions.

“It is becoming increasingly hard” to argue that the central bank must look past the impact of higher food prices against the background of a weak economy, Citibank economist Ivan Tchakarov wrote in a note on Thursday.

Rate hikes are coming “sooner rather than later,” he said.

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