The board of the Central Bank of Russia resolved to keep the key interest rate unchanged at 7.5% at the policy meeting of October 25, as widely expected by the market. 

In September the CBR surprised the analysts and front-loaded the rate with 25bp hike. September's rate increase, coupled with halting Fx interventions until the end of the year was the reaction to emerging market volatility, ruble weakening, and sanction pressure on Russian assets with anticipated US sanction toughening this autumn.

The CBR commented that actions taken in September have stabilised the domestic financial market and calmed ruble volatility, which justified a neutral rate decision in October.

Analysts surveyed by Vedomosti daily this week also note that ruble has recovered since the last meeting by 4% to US dollar, while yields on OFZ bonds stabilised, which spoke in favour of flat rate decision. At the same time inflationary pressures continued in September, but still seen as in line with revised CBR's outlook.

The accompanying press-release warned that "inflationary risks remain elevated, especially in the short-term" and that "uncertainty remains concerning further developments of external conditions."

In these conditions the CBR left the possible rate hike on the table, saying that moving forward, it will "assess the practicability of increasing the key rate, taking into consideration the dynamics of inflation and economic growth, as well as external risks and financial markets' reaction to them."

"While the unrevised guidance remains distinctly hawkish, we believe that the tone underscores not the intention to move rates higher but that the Board is keeping all options open," VTB Capital commented on October 26, adding that "this is understandable, as in direct correspondence to the traded options, the value of keeping all types of change in the policy rate possible is greater when economic uncertainty is high (thus making any commitment to a better defined plan potentially costly)."

New information informing the outlook on the path of the key rate is to be clustered around the December meeting, VTB reminds. The CBR's next meeting is scheduled for December 14, accompanied by a release of revised macro forecast and a press-conference by the head of the regulator Elvira Nabiullina. 

Even with the defensive rate hike in September the ruble has remains volatile and has swung widely as currency traders react to news on possible new US sanctions underlining the fragility of the currency.

US National Security Adviser John Bolton was in Moscow this week to discuss the US possible withdrawal from a Cold War-era Intermediate-Range Nuclear Forces Treaty (INS) that was signed between Soviet president Mikhail Gorbachev and US president Roland Regan in 1987 that limits the deployment of medium-range missiles in Europe.

The ruble gained 1% in day when Bolton suggested that the US would not impose new “crushing” sanctions on Russia this autumn, only to sink again when it became clear that Bolton was talking about new sanctions related to the poisoning of former spy Sergei Skripal and the sanctions that may target Russian sovereign bonds were still on the table.

Other analysts say the rate hike was actually a smoke screen to cover up the more substantial decision by the CBR to withdraw from interventions in the currency market and suspend its currency purchases for the rest of the year, which bne IntelliNews reported but has remains largely uncommented on.

“The decision to raise the key rate looks like a cover-up,” Natalia Orlova, chief economist at Alfa Bank said to Bloomberg. “It allowed them to distract attention from the announcement on halting the FX purchases and to create the impression that the central bank is regulating the economy with the help of interest rates.”