Central Bank of Russia says 'very high' probability of new rate increase

MOSCOW. Nov 6 (Interfax) - There is still little likelihood of a pause in the monetary policy tightening cycle in December, the Central Bank of Russia said in the summary of its October 25 key rate discussion.

The signal about the possibility of an increase, which was also present in the previous summary, was enhanced by changing the wording from "high" to "very high".

The Central Bank board of directors at its meeting on October 25 decided to raise the rate from 19% to 21% - the increment was 1 percentage point at its September meeting - while maintaining a hawkish signal for the future.

It said that following the discussion, "the majority" of participants were in favor of raising the rate to 21% per annum. The September summary did not disclose the exact proportion of votes in favor of one option or another, and used more incontestable wording, that the decision was reached "by broad consensus".

The latest summary also says there were proposals for a more moderate increase to 20% per annum, and a bigger one to 22%.

"Those who proposed a 300 basis points increase said that this would enable inflation to be lowered more quickly and insure against new inflationary risks, which remain high. This will also help to reduce inflationary expectations more assuredly. However, most participants agreed that a sharp change in the rate could lead to increased volatility in financial markets. Therefore, greater caution is required when choosing the size of the step," the summary said.

Those who proposed a 100 bps increase said the effects of the ongoing tightening of monetary conditions would continue to grow as market participants formulate valid future policy expectations. "However, most participants in the discussion agreed that such a decision was not commensurate with the inflationary factors and risks that have materialized since the September meeting," the Central Bank said.

Combined with a strong upward shift in the forecast key rate path in the baseline scenario, a step of +200 bps will give the necessary impetus to tighten monetary conditions, resume the disinflationary process and lower inflation expectations, the regulator said. Two signal alternatives were discussed at the meeting: a tough one (holds open the possibility of increase) and a moderately tough one (will assess the advisability of increase), depending on the estimate of the likelihood of such a step.

"Those participants who advocated a moderately tough signal said that it was necessary to further assess the effects on the economy from previous key rate decisions. Accordingly, a moderately tough signal reflects a somewhat lower likelihood of key rate increase than a tough signal. However, most agreed that holding the key rate at the next meeting would be possible only in the event of a significant slowdown in sustainable inflation and the emergence of factors that could return inflation to its target more quickly. So far, there are few signs of this," the Central Bank said.

Also, a moderately tough signal could result in premature expectations among market participants for an end to the monetary policy tightening cycle, the summary says. "Although an increase in the key rate at the next meeting is not inevitable, the probability of one is very high. So it is necessary to repeat the tough signal that the Bank of Russia gave in September," the CBR said.