07:38 AM EDT, 10/28/2024 (MT Newswires) -- Russia's central bank (CBR) has always been a credible and prudent central bank in the emerging market world, said Commerzbank.

The bank admired its past decisions when the CBR hiked rates right after government figures demanded rate cuts from time to time. Impeccable credentials notwithstanding, Commerzbank now asked whether or not CBR might be overdoing monetary tightening.

CBR hiked its key rate by 200bps to 21.0% on Friday. This was within range of estimates, but the majority of analysts had predicted only 100bps, wrote the bank in a note to clients. What is more, the central bank maintained extra-hawkish language going into its Dec. 20 meeting, clearly signaling the possibility of another hike then.

This possibility was further backed up by an upward revision to the bank's official key rate forecasts for the coming years, stated Commerzbank. CBR officially delayed its timeframe for achieving the inflation target from 2025 to 2026. One of the main reasons for this changed outlook is, supposedly, above-trend economic growth.

This picture begins to make less sense now, added the bank. A lot of this growth is sectorally unbalanced, with continuing shrinkage of the private sector in favor of state commodity, energy and wartime production. These latter sectors are being strategically pushed at the moment and defense, for example, has access to capital from the government directly, as such immune to CBR's interest rate hikes.

Most private forecasters and institutions anyway see Russia's gross domestic product growth decelerating to the 1.5% range next year from about 3.5% this year. While inflation has indeed proven stubborn this year, the reasons are clear to see from extra impetus from wartime spending and forced import substitution because of a lack of international supplies.

Is CBR's reaction function truly proportionate to the inflation problem at hand, asked Commerzbank. The bank noted it could always argue that a prudent central bank should choose to keep interest rates arbitrarily high until any inflation overshoot has been stamped out. But somehow, given the background of inflation in present-day Russia, this argument for raising rates seems less compelling.

The USD-RUB and EUR-RUB technical fixes aren't affected by interest rate decisions these days. USD-RUB was trading at around 96.48 before the announcement and, in fact, ended the day higher at 97.35 despite all the hawkish developments, according to Commerzbank.