CBR preview: Where is the tolerance level? – Nordea Markets

According to Tatiana Evdokimova, Research Analyst at Nordea Markets, this Friday’s CBR decision will probably be the most intriguing in the last two years as the market is starting to price-in a rate hike.

Key Quotes

“The RUB remains vulnerable as sanctions threats are still high and emerging markets meltdown keeps going. On the upcoming meeting this Friday the Central Bank of Russia will be choosing whether to keep the key rate unchanged (at 7.25%) or to proceed with the first hike since 2014.”

“The CBR has already signaled that it sees many factors in favor of keeping the key rate unchanged while some factors start to speak for a hike.”

“We believe the CBR still has some buffers allowing to avoid a hike for now. But the situation on the FX market remains very volatile and the developments during the rest of the week may well influence the CBR decision quite dramatically.”

“RUB weakness is an important concern for the CBR since it passes through to inflation.”

“With the CBR’s ability to defend the RUB being quite limited, the decision to hike or not to hike will mostly be made based on inflation outlook.”

“The inflation outlook is getting more and more worrying with multiple factors playing out at the same time.”

“All in all these risk factors bring us to inflation forecast of more than 5.5% in Q1 2019. For now this spike still looks temporary with inflation returning to 4.7% by the end of 2019. The temporary nature of this increase is the main argument against hiking the rate now.”

“In the meantime the CBR will considerably toughen its rhetoric in the press-release indicating possibility of monetary tightening in the coming months.”

“The Governor’s press-conference will also be watched with close attention, the regulator will probably try to calm down the market revealing more details about the instruments available for ensuring financial stability in case of more sanctions.”

“The CBR will also keep a close eye on the money market where until present the RUB liquidity was efficiently absorbed reducing chances for speculation against the RUB.”

“The CBR is also due to publish its updated inflation forecast. This may give a clue as to what levels of inflation the CBR is able to tolerate.”