Market will price in CBR rate hike before regulator's decision amid heightened inflationary risks - governor's advisor

CHELYABINSK. Nov 7 (Interfax) - The market will price in an anticipated hike in the key rate by the Central Bank of Russia before the regulator's decision amid heightened inflationary risks, but if the bank maintains the rate against market expectations it will undermine trust in its policy, advisor to the CBR governor Kirill Tremasov said.

"If we see genuinely strong growth in inflationary trends at the December meeting, which is less than a month and a half away, if we see strong growth in or the same rate of growth in corporate lending, or faster growth in corporate lending, [or] if we see a set of other inflationary factors, then the market will price in the upcoming rate hike prior to our decision. As we've seen multiple times, rates for bonds, in the public debt and corporate bond segments, will rise in anticipation of our decision," Tremasov said at the Russian Economic Forum in Chelyabinsk.

"If we don't raise the rate under these conditions, when seeing increased pro-inflationary risks and rising inflationary trends, then that will most likely lead to an erosion of confidence in our monetary policy. In that situation, economic actors might think that the Central Bank no longer sees ensuring price stability as a priority," he said.

Under such conditions, market rates will rise much more strongly than they would if the key rate had been raised, he said. "The cost of lending is not just a function of the key rate; it is also influenced by inflation and inflation expectations. If the Central Bank does not respond to inflationary risks, the situation could spiral out of control, as seen in the case of Turkey," he said.

The market's inflation expectations are higher than the regulator's forecast, he said.

"Markets can also be mistaken. It's very important to understand that what is currently embedded in the market significantly deviates from the Central Bank's baseline forecast. If inflation follows this trajectory, we will most likely have to implement a tighter monetary policy. It cannot be otherwise. If you expect higher inflation, you cannot expect a lower rate. If inflation deviates upwards from our forecast, we will conduct a tighter monetary policy," he said.

By raising the key rate by 200 basis points to 21% in October, the CBR sent a strong signal that it leaves open to the possibility of another rate hike at its next meeting.

"At the end of the October meeting, we signaled that the rate could be raised further in December. We leave open this possibility, but it's not a predetermined decision. It is important to understand that there is still a month and a half until the December meeting, so we will analyze incoming information, look at how the economic situation is developing, and make a decision based in particular on the picture of how the economy is deviating from our forecasts," he said.

The key rate may deviate from the forecasted trajectory if there are changes in the parameters of the macroeconomic forecast, he said.

The CBR predicts that the average key rate will be 17.5% in 2024 and 21%-21.3% until the end of the year, and 12%-13% in 2026. It expects it to return to a neutral level of 7.5%-8.5% by 2027.

"The average annual key rate for the next year is 17%-20%. It is important to understand that the forecast for the key rate, its trajectory, depends on whether we are within the baseline forecast or not. The Central Bank is not obligated to keep the rate at this level of 17%-20%. If the economic situation significantly deviates from the baseline forecast in one direction or another, the rate along with the forecast will also deviate. The rate is part of the forecast. It is balanced with all of the forecast's other macroeconomic parameters," Tremasov said.

The rate will need to be raised further if inflation follows a higher trajectory, he said.

The Central Bank is forecasting inflation at 8.0%-8.5% in 2024 and at 4.5%-5.0% in 2025.

"I hope that inflation will return to 4% by the first half of 2026 and remain at that level thereafter," he said.