The board of the Central Bank of Russia (CBR) resolved to keep the key interest rate unchanged at 7.5% at the policy meeting of March 17, while maintaining a hawkish rhetoric, but refrained from issuing a tougher monetary guidance. The market expected the CBR to maintain the rate at 7.5%.

As followed by bne IntelliNews, in February the CBR resolved to keep the key interest rate unchanged at 7.5%, marking the most recent meeting a fourth consecutive decision to keep the rate flat. (chart)

In February, the CBR did not cave in to reported Kremlin pressure to send out dovish monetary signals to spur growth. Instead, the regulator issued a hawkish guidance and warned of the widening budget deficit. The CBR maintained the same wording in March.

"Overall, the balance of risks for inflation has not changed significantly since the previous meeting of the Bank of Russia's Board of Directors," the CBR said in a statement and maintained its inflation forecast of 5-7% for 2023 and return to around 4% in 2024. 

The regulator again said that if pro-inflationary risks intensify, it "will assess the feasibility of raising the key rate". 

The CBR “repeated verbatim the signal from the February board meeting. The regulator noted the moderate price growth rate (on average, it has been at the target level since the beginning of the year), despite the weakening of the national currency and increased budget expenditure,” Renaissance Capital commented.

The regulator also reiterated that consumer demand is subdued, despite recovering economic activity. As before, geopolitics, fiscal spending dynamics and the labour market are seen as the main risks to inflationary outlook.

Previously the analysts surveyed by Vedomosti expected the CBR to still raise the key rate in the range of 8%-8.5% by the end of the year.

But Renaissance Capital argues that this depends on which way the inflationary pressures move in the second half of 2023.

“We continue to expect the key rate reduction this year (in H2) as the pro-inflation risks decline. We believe that the maintenance of a tough signal from the Central Bank of Russia, along with a significant slowdown in annual inflation, will help reduce inflation expectations in the economy and allow the regulator to resume the monetary policy easing cycle,” RenCap wrote.

RenCap analysts believe that the rate could be lowered as much as 6.5% at year-end.