While the recent uptick in inflation expectations increases the risk of a larger rate hike and this is now being priced by the market, we continue to expect the CBR to hike its policy rate by 50bp at its board meeting on Friday morning (October 31).
In our view, the rationale for a rate hike of this magnitude would be grounded in the recent deterioration in inflation dynamics, and we think a larger rate hike would not be the most cost-effective tool to stem the recent weakening of the Ruble. Given the options available, we expect the Bank to abolish its current intervention rule and conduct a discretionary currency intervention of a magnitude sufficient to stabilize the FX market and signal to the market that the CBR views the recent FX volatility as a significant risk to its mandate.
Such a policy choice would likely be more effective and significantly less costly than a large policy rate hike.
Timing the change to the FX policy is difficult. Nonetheless, we think that a change to FX policy prior to Friday’s rate decision would give the CBR additional policy optionality with respect to its interest rate decision. Our expectations for the CBR’s decision continue to suggest that OFZs and Russian sovereign credit remain attractive.
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