The Bank of Russia raised its key rate by 50 bps to 5% at its core meeting on April 23. Therefore, the regulator swiftly returned to a neutral monetary policy (1-2% above inflation target). The decision was driven by persisting inflationary pressure and inflationary expectations growth. The bank updated its medium-term macro-forecast and raised the year-end CPI estimate by 1 pt to 4.7-5.2%. Annual inflation will return to the target in the middle of 2022 (previously it was projected to take place in the first half of 2022). Meanwhile, the regulator has somewhat eased the signal about future moves, though it remained
In an important move, the bank has published the average key rate trajectory for the calendar year it had announced earlier. This step reflects material progress in improving communication with the investment community. The key rate will average at 4.8%-5.4% this year, 5.3%-6.3% in 2022 and 5-6% in 2023. In other words, the baseline scenario assumes that the key rate may either remain flat at 5%, or be raised to 6% by the end of the year. Overall, as part of the current monetary normalization cycle, the rate is unlikely to exceed 6.5%, which, incidentally, is in line with the three-year OFZ prices.
The Bank of Russia's decision met our expectations, nor was it a surprise to the market. Based on the updated information (including the trajectory of the average rate), we believe the regulator will keep tightening monetary policy, bringing the key rate to at least 5.25-5.5% by the end of the year. The bank is likely to hike the key rate by 25bps at the next meeting on June 11. Our base case scenario suggests that OFZ 10Y yields would reach 6.7-6.8% per annum by the end of December 2021 (now around 7% per annum).
The OFZ market gained a strong positive impulse last week after the Russian troops pulled back from Crimea and the border regions of Ukraine after drills to their permanent bases. The sovereign curve dropped by 12-15 bps in the long and belly segments, as geopolitical risks eased. On Friday, April 23, in the run-up to the Bank of Russia's decision, ruble government bonds traded in a very narrow range. The first reaction of the market to the rate hike was negative, despite the fact that the short OFZ market had priced the increase in long ago. Investors were probably confused by the persisting hawkish rhetoric, as well as the publication of an average rate forecast that envisaged further massive tightening. Later, however, the market paired most of the losses and closed almost flat. It is therefore no surprise that the near-term bonds lagged a bit following the signal about further key rate hikes. The rouble strengthened as expected.
Source: ООО ИнтерИнвест, Bloomberg