Russia's CBR expected to cut rate, refine guidance

Russia's CBR expected to cut rate, refine guidance
Russia's CBR expected to cut rate, refine guidance
By Vadim Dumes in Paris September 14, 2017

The Central Bank of Russia is widely expected to resume the monetary easing cycle and cut the key interest rate by 50bp to 8.5% at the upcoming policy meeting of September 15.

The regulator triumphed over inflation and managed to curb the CPI to the lowest in post-Soviet history, overshooting the 2017 target of 4% already.

This makes the analysts confident that the key interest rate will be cut by 50bp, with 20 out of 23 economists surveyed by Reuters expecting a cut. Alfa Bank "has no doubt" that the key rate will be cut, while Gazprombank sees the September 15 as a "done deal".

"Since the previous meeting on July 28, when the CBR left the key rate unchanged at a level of 9%, inflation has noticeably decelerated to 3.3% y/y from 3.9% y/y a month earlier, and thus the CBR has grounds to lower the rate by 50bp," Gazprombank wrote on September 12. 

VTB Capital also supports a 50bp cut on the upcoming meeting, backing it up by a decision tree analysis of CBR's previous meetings, noting that preceding guidance was not hawkish, inflation has dived, and a meeting is a core meeting accompanied by a press conference. 

The government pushes the CBR to lower the interest rate, with the Minister of Economic Development (rumored to be Kremlin's new economic policy vehicle) Maxim Oreshkin saying on cabinet's meeting with President Vladimir Putin that inflation currently being 1pp below the target is a "signal for the regulator to cut rates".

Moving forward, an environment of lowering interest rates in widely expected. Alfa sees the key rate cut to 7.5% in 2017. VTB Capital expects 7-7.5% key interest rate by the end of 2018.


The CBR governor Elvira Nabiullina on September 8 said that she sees room to cut the key rate, but still sees inflationary risks lingering.

Once the central bank reaches its nominal equilibrium rate of 6.5-7% percent, it can resume purchases of foreign currency for reserves, according to Nabiullina, who previously reiterated the goal to rebuild the Fx/gold reserves to about $500bn from current $420bn.

The analysts will be attentively reading the usual accompanying statement by the CBR and the following press-conference on September 15 to see the regulators guidance on monetary policy moving forward.

Gazprombank expects the rhetoric to remain cautious, noting that many disinflation factors remain out of the CBR's control, such as US dollar depreciation on global markets and rising oil prices. 

The bank also sees the revival of demand in the local banking system for repo with the CBR and expansion of the list of instruments of potential support to the banking system "might become an additional argument against an aggressive cut in the cost of CBR refinancing in the medium term." 

VTB Capital on September 13 reminds that the CBR in the past  was "reluctant to pre-commit to a defined course of action" and thus the analysts expect little change from the previous wording on moderate monetary easing.

"We expect the CBR to present a more nuanced definition of the inflation target to which it commits: the 4% will not change, but the CBR might explicitly outline the horizon for returning to the target after departures, and could specify tolerance bands," according to the VTB.

Currently, the policy for the CBR is under six months and should it be extended, this would mean more scope for monetary easing, or higher tolerance to transitory price shocks.


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