The board of the Central Bank of Russia (CBR) at the policy meeting of April 28 resolved to maintain the key interest rate at 7.5%, taking no monetary policy action for the fifth consecutive meeting and maintaining the rate unchanged since September 2022.

The decision to maintain the key rate unchanged is in line with consensus market expectations. At the previous meeting in March the CBR resolved to keep the key interest rate unchanged at 7.5% and maintained hawkish monetary guidance. (chart)

As followed by bne IntelliNews, despite inflation rapidly converging to the long-term target of 4% in March, the head of the CBR Elvira Nabiullina did not rush to confirm the disinflationary trend, let alone signal any dovish policy shifts. She attributed the plunge in inflation to seasonal factors and the high comparison base (price growth spiked at over 16% in March 2022).

Notably, in the press-release accompanying the latest policy decision, the CBR doubled down on the previous hawkish guidance and said that it is ready to hike the rate if necessary to maintain inflation within the 4% goal.

"Given the gradual increase in current inflationary pressures, the CBR  will assess at its upcoming meetings the feasibility of raising the key rate to stabilise inflation near 4% in 2024 and beyond," the regulator wrote.

This confirms that the CBR is unlikely to support the government to spur growth with lower interest rates unless a stable accross-the-board deflationary trend is observed over the medium term. In February, the CBR did not cave in to reported Kremlin pressure to send out dovish monetary signals, issued a hawkish guidance instead, and warned of the widening budget deficit. 

While the CBR’s overall rhetoric has not changed much relative to March, what draws one's attention is the new wording that mentions a "gradual increase in current inflationary pressures", which makes it sound tougher, Renaissance Capital analysts believe.

“Based on the rhetoric and the updated outlook, the CBR is serious about a possible rate hike and will discuss it in June as well (as it did this Friday),” Renaissance Capital commented. The analysts still believe that “despite such a tough signal, keeping the current inflation rate subdued will avoid a [key rate] tightening”. 

Still, in April the CBR has expectedly improved the inflation forecast for 2023 from previous 5%-7% to 4.5-6.5%, maintaining the 2024 inflation guidance unchanged at 4%. While inflation will stay low in the coming months due to the base effect, it will accelerate in 2H23, the CBR expects.

The regulator expectedly highlighted continuously high population inflationary expectations. The CBR also noted a tight labour market, weak demand for Russian exports, and possible increase in import prices due to pertaining logistical problems as potentially pro-inflationary. 

The analysts also warned that recent ruble weakening, along with fiscal challenges, could also influence inflation.