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Tatiana Evdokimova, Research Analyst at Nordea Markets, points out that the Central Bank of Russia (CBR) will make its key rate decision this Friday and there is no doubt that the key rate will stay unchanged at 7.25%  as last time the Governor and the press-release stated clearly that the reduction of the key rate to the neutral range of 6-7% is postponed from 2018 to 2019.

Key Quotes

“Several factors pushed inflationary risks considerably higher in Q2 and now a key rate hike scenario for 2019 is not something completely extravagant.

1.  Gasoline prices grew by 9.4% since the beginning of the year  causing inflation components to show diverging paths with food inflation staying at record low levels (-0.2% y/y in June) and non-food inflation approaching the 4% target in June.

2.  RUB weakening since early April (by 5.1% in nominal effective terms) is also pushing some prices upward even though the magnitude of this effect is quite modest.  

3. Mentioned factors were already enough to push inflation to around 4.3% by year end. In  addition  the government is going to increase the VAT from 18% to 20% starting from 2019.”

“For now record low food inflation is still masking this mounting inflation pressure but seasonally adjusted m/m annualized inflation is already running at a level of around 4.6%.”

“The crucial issue for the coming months is the impact of rising inflation on inflation expectations that are in focus of the CBR attention.”

“All that being said we expect the CBR to remain very cautious since it has to strengthen its credibility and avoid significant deviations of inflation from the target.  Russian key rate will thus remain one of the highest in EM space but that alone may not be enough to generate significant additional capital inflows into Russian sovereign bonds (OFZ).”

“Contrary to 2017 there is no clear expectation of easier CBR policy that used to push OFZ prices higher and thus attract investors.  We don’t expect the RUB to show any noticeable reaction to the CBR decision this Friday.”