Russia Reiterates Inflation Targeting Commitment Despite Shocks, Says ING

The Central Bank of Russia (CBR), in its first scheduled meeting since its attack on Ukraine, kept its key rate on hold at a steep 20 per cent on Friday, citing inflationary risks and added that fiscal expansion is a tool to support the economy if the need be.

In an emergence move shortly after what Moscow calls "a special operation in Ukraine" on February 24, the Russian central bank had raised rates to 20 per cent from 9.5 per cent, and Russian officials announced capital key controls to help financial stability.

"The Bank of Russia kept the key rate at 20 per cent, citing inflationary risks and pointing at the budget as the tool to support economic growth. Combined with the president's support to Ms. (Elvira Sakhipzadovna) Nabiullina's reappointment as CBR governor and his warning against direct price controls or monetary emission, Russia's commitment to inflation targeting seems to be intact," said Dmitry Dolgin, Chief Economist for Russia at ING.

"Today's decision to keep the key rate at 20 per cent is unsurprising and in line with our expectations, as the emergency hike two weeks ago was pre-emptive enough. A further increase in the key rate now would have signalled additional nervousness to the market, while a cut would contradict the logic of inflation targeting," he added.

The Russian central bank, in its statement, said the emergency increase in its key rate to more than double had "helped sustain financial stability" but cautioned that the economy was undergoing a "large-scale structural transformation."

The CBR statement added that fiscal policy decisions would broadly impact economic activity and inflation dynamics. 

"This means that CBR expects fiscal easing to be the main tool of economic support in the coming months," said ING's Mr Dolgin.

"While the central bank's statement lacks any detailed quantitive assessment of the economic situation in Russia, we believe the text generally implies CBR's agreement with the consensus forecast of analysts polled by the CBR on March 10. The results of the poll suggest 2022 CPI of 20 per cent, unchanged key rate till the year-end, 8 per cent GDP drop amid 10 per cent drop in real wages, followed by an 'L-shaped' recovery, USDRUB (rouble) of around $110 with further depreciation," he said.

In addition to geopolitics and monetary policy, "the important factors to watch on the Russian economy going forward include the current account, capital outflows and potential repatriation, and fiscal policy," added Mr Dolgin.