In February the CBR gave the market a dovish guidance and delivered on it in March with a 25bp cut of the benchmark 1-week repo rate to 7.25%. BCS Global estimated that real interest rate currently run at about 5%, well above the regulator's 'neutral rate' upper limit of 3%. However, concerns raised by the most recent round of US sanctions overpowered the rate cutting agenda and might make the CBR to more into a neutral policy phase.

BCS sees that no-change rate decision as "wise" amid the "current mix of elevated geopolitical risks, rising turbulence on emerging markets as investors position themselves for a more hawkish policy by the [US] Fed." 

Inflation-minded regulator has almost no space to maneuver due to an expected increase in inflationary pressures following recent RUB's devaluation. BCS sees limited scope for further ruble downward move and the selloff on the equity market due to the support from rising oil prices.

In the accompanying press-release the CBR noted that recent ruble weakness could push inflation closer to the 4% target faster than expected, but expressed confidence that inflation will still remain within the target. 

Sberbank CIB does not expect inflaiton to rise above the bank's 3.2% year-end forecast if USD/RUB rate stabilises near RUB60 or lower. Inflation could accelerate to 4% if the USD/RUB exhange rate remains in the RUB60-68 range, the bank estimates. 

"If inflation starts to deviate significantly from the CBR's estimates, it will be viewed by the regulator as a sign that action is needed," Sberbank believes, expecting the CBR to leave the rate unchanged at least until June and then cut it if inflation falls to 2% or lower.

BCS also expects the CBR to cut the rate by another 25 bps to 7% in mid-June at the next meeting should there be no new escalation in geopolitical risks and no major disruption on the global markets CBR could cut its benchmark rate. 

"However, it might well be the last rate cut for the year especially if we see a more pronounced upward move in annualized CPI rate during 3Q18," BCS believes.

Renaissance Capital on April 27 highlighted that the CBR has explicitly stated that its estimate of the neutral interest rate has moved closer to the upper bound of the 6-7% range due to an increase in the Russian risk premium and higher rates in developed markets. The CBR also confirmed that it still plans to move to a neutral policy this year. 

The analysts of Renaissance Capital see this as suggesting that a terminal policy rate target of 6.75% is in line with the CBR’s official view. 

The CBR also highlighted inflationary risks stemming from upcoming budget and tax decisions as a source of inflation risks, including this in the press-release for the first time since mid-2016 and pointing to regulator's concerns about the impact of potential tax increases and/or higher social spending after the fourth term of President Vladimir Putin takes effect in May.

Renaissance Capital thus believes that the CBR effectively moved from from a ‘dovish’ to a ‘neutral’ phase, and should uncertainty remains in place, the regulator could be a triggered by certain red lines to move into a ‘hawkish’ phase.