The Central Bank of Russia (CBR) decided to keep the key interest rate unchanged at 10% on October 28 at its board’s penultimate meeting of the year. In line with broad market expectations, the regulator followed its own guidance which excluded monetary policy easing this year.

Although inflationary and economic activity dynamics “overall comply with the forecasts”, the CBR noted that consumer price dynamics are distorted by one-off factors and inflationary expectations decline remains unstable.

At the previous meeting on September 16, the CBR cut the rate by 50bp to 10%, citing slowing inflation and inflationary expectations on the backdrop of unstable economic activity. But despite cutting the rate, the regulator immediately ruled out the possibility of further cuts this year.

The CBR reiterated that the rate will not be cut in 2016, with the decline of the key interest rate possible in either first or the second quarter of 2017. All 25 economists surveyed by Reuters on October 27 believed the regulator would leave the rate at 10% and that it will be cut by a further 50bp no sooner than the first quarter of 2017.

Although the CBR acknowledged that strong anchoring of investors’ expectations with the no-cut-this-year guidance has had it upwards effects on the interest rates on the market, it stressed that “inflationary expectations of market participants for the end of 2017 still exceed the 4% target of the Central Bank of Russia”.

Thus the “moderately tight” monetary conditions will be maintained for a “considerably long time”, the CBR assured.

"The consistently hawkish commentary given by the CBR during its past two meetings highlights ongoing risks that its inflation targets for end 2016 (5.5-6%) and end 2017 (4%) could be exceeded," Gazprombank commented on October 28. The bank reiterated the forecast for CPI at end 2016 and 2017 at 6-6.5% and 5-5.5%, respectively. 

The regulator argues that positive real interest rates will maintain monetary and crediting conditions that secure demand for credit without feeding inflationary pressures, while maintaining stimulus for savings (which should curb inflationary effects of demand recovery).

As usual, the CBR dismissed the widespread criticism that high real interest rates are not helping the economy to recover, arguing that tight monetary policy does not hinder economic activity recovery, with the main limitations being of structural nature.

“The risks for not reaching the 4% inflation target for 2017 are still present,” the CBR wrote in the press release, highlighting real salary growth not supported by productivity gains, uncertainty over specific budget consolidation measures, including indexaton of salaries and social spending in the mid-term perspective, as well as global commodity and financial markets’ volatility.

All these factors should be watched ahead of the next CBR meeting on December 16 to assess the likelihood of the rate cut in the beginning of 2017. The press release specifically reiterated that no rate cuts should be expected in 2016.

A surprise softening of the tight monetary policy in December seems even more unlikely due to the fact CBR remained cautious on inflation outlook for 2016 and did not reiterate its target for annual consumer price growth of 6.5%, thus likely seeing risks to the forecast.

While Gazprombank had expected that the next key rate cut could be announced at the central bank’s meeting in March 2017, the bank now believes the decision will be delayed until the second quarter of 2017.

In addition, the tough commentary by the CBR will "exert some pressure on the debt market, which will have to adjust its further expectations regarding monetary policy", the bank argues.