Russia Repeats Inflation Target Commitment Despite Surprise, ING Says

Russia reiterated its commitment to target inflation despite surprises, ING said

The Russian Central Bank (CBR), in its first scheduled meeting since its attack on Ukraine, kept its key rate delayed at 20 percent on Friday, citing inflation risks and adding that fiscal expansion is a tool to support the economy if necessary.

In an emerging move shortly after what Moscow called a “special operation in Ukraine” on Feb. 24, Russia’s central bank has raised rates to 20 percent from 9.5 percent, and Russian officials announced key capital controls to help financial stability.

“Russian banks maintained key rates at 20 percent, citing inflation risks and pointing to the budget as a tool to support economic growth. Combined with the president’s support for the reappointment of Ms. (Elvira Sakhipzadovna) Nabiullina as CBR governor and her warning against direct price controls or monetary easing, the commitment Russia’s inflation target appears to be intact, “said Dmitry Dolgin, Russia’s Chief Economist at ING.

“Today’s decision to keep the key rate at 20 per cent is not surprising and in line with our expectations, as the emergency hike two weeks ago was quite early. A further increase in the key rate now will signal additional concerns to the market, while the cuts will contradict logic. inflation target, “he added.

Russia’s central bank, in a statement, said the emergency increase in its key rate to more than doubled had “helped maintain financial stability” but warned that the economy was undergoing “large -scale structural transformation.”

The CBR statement added that fiscal policy decisions will have an impact on economic activity and inflation dynamics.

“This means CBR expects fiscal easing to be a key tool of economic support in the coming months,” said Mr Dolgin of ING.

“While the central bank’s statement does not have any detailed quantitative assessment of the economic situation in Russia, we believe the text generally implies CBR’s agreement with the consensus forecast of analysts surveyed by CBR on March 10. The survey results suggest a 2022 CPI of 20 percent, the key rate is not changed until the end of the year, an 8 per cent drop in GDP amid a 10 per cent fall in real wages, followed by an ‘L-shaped’ recovery, the USDRUB (ruble) around $ 110 with further depreciation, ”he said.

In addition to geopolitical and monetary policy, “important factors to consider on the Russian economy in the future include the current account, capital outflows and potential remittances, and fiscal policy,” Mr Dolgin added.


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