Scenario with new surge in lending, inflation fraught with 'significant' rate hike in Feb - Central Bank of Russia
MOSCOW. Dec 28 (Interfax) - If the Central Bank of Russia pausing the cycle of hiking the key rate in December restarts the surge in lending and triggers a new round of inflation, then the CBR could be required to tighten monetary policy significantly in February, the regulator said.
The CBR board of directors on December 20 unexpectedly retained the key rate at 21% per annum, with market consensus having projected the regulator to hike the key rate to 23% pa. The CBR board also considered options to hike the rate 1 percentage point and 2 pp, though ultimately decided to pause, considering the decision the most balanced. The CBR traditionally describes the arguments in favor of the options considered during the board meeting in a summary of the "week of silence" and the meeting, as published on Saturday.
"If the key rate is retained in December, then the risk cannot be ruled out that lending growth accelerates again in the coming months, while inflation and inflation expectations continue to grow. In this situation, the Central Bank of Russia plans to resume tightening monetary policy. A significant hike in the key rate would likely be required to alter trends in lending and inflation," the CBR said.
However, if the key rate is hiked in December, then there is a risk of "over-tightening" monetary conditions given the current assessments of the tightness, the CBR said.
"Consequently, a scenario of excessive cooling in economic activity could occur, leading to a subsequent significant deviation in inflation downward from 4%. This would contradict the principles of the Central Bank's monetary policy within the inflation-targeting regime. Monetary policy should assist in reducing cyclical fluctuations in output, which is monetary policy's countercyclical role, in order to stabilize inflation on target sustainably. Therefore, a pause in altering the key rate is currently a more balanced decision," the CBR said.
However, the participants said that it is necessary to maintain an indication of the possibility to raise the key rate at the next meeting despite the unchanged rate in December, using "a moderately hawkish signal suggesting a lower probability of the step," the regulator said.
"Growth in inflation and inflation expectations and the continuing significant overheating of the economy cause concern. If the trends in lending dynamics that have formed do not continue and accelerated growth resumes and the trends in inflation dynamics do not reverse by the February meeting, then it would be possible to return to the matter of hiking the key rate. Moreover, a moderately hawkish signal would not allow expectations of an accelerated reduction in the key rate to form in the future, which would consolidate the necessary tightness in monetary conditions," the CBR said.
The CBR's next board meeting on the key rate is on February 14.