The Central Bank of Russia (CBR) reduced the key lending rate by 0.25 percentage points to 9.75% on March 24, despite broad market expectations of no change this month. The ruble strengthened to a three-day high against the dollar following the decision.

“The decision had not been entirely priced in by the market and was followed by a positive reaction in the ruble exchange rate,” Gazprombank commented on the early currency market reaction.

Of 41 experts surveyed by Bloomberg, 30 had expected the rate to remain unchanged, while the rest expected a reduction of  0.25-0.5pp. Notably, the expectations were not as clear-cut as before, as for the previous CBR board meeting a broad consensus saw the rate remaining unchanged.

However, following curbing the consumer price growth that exceeds the expectations of the regulator, the CBR on March 24 admitted that the risks threatening the 4% inflation target in 2017 "have abated", paving way for reopening of an easing monetary cycle.

Capital Economics commented that the decision to cut the key rate (in fact a one-week repo rate) “is likely to mark the start of a lengthy easing cycle”, expecting a further 175bp of rate cuts this year and 200bp of cuts in 2018.

Senior Emerging Markets Economist at Capital Economics William Jackson argues that “the output gap that has opened up in the Russian economy should drag core and headline inflation down further, and more quickly than the central bank anticipates”, which would provide substantial room for further easing. 

Although the CBR has allowed the possibility of further cuts this year, the policy is still characterised as "moderately tight", helping to keep the inflationary effect of unstable external environment, recovering demand and credit activity in check.

Nevertheless, the statement differs markedly from the previous press-releases of the CBR and the tone closely watched by the analysts is dovish. 

After the ruble's plunge in late 2014, the CBR made an emergency hike of the rate to 17%, starting a monetary easing cycle in the end of 2015 and lowering the rate to 10% by summer 2016.

However, with the sharp decline of oil prices last year, the inflation-minded central bank defied expectations and kept the rate flat at 10%. The conservative policy helped to keep inflation in check, curbing the CPI below 5%, the lowest in post-Soviet history.

Since the beginning of 2017 the disinflationary trend continued, beating the CBR expectations, with weekly inflation consistently close to zero and annual numbers converging to central bank's 2017 target of 4%.

At the latest meeting in March the bank was facing a difficult dilemma between the high uncertainty of the external environment and the weak growth/slow inflation points to the need for a rate cut this year.

By choosing to cut the cut rate the CBR also indirectly credited the government with the ability to maintain a strict fiscal framework and abstain from spending extra oil revenues ahead of the presidential elections in 2018, the concern which was voiced by the CBR in previous statements. 

“In our view, yesterday's government decision to limit the April hike in the freight truck levy from 100% to 25% was the final straw that warranted an improvement in short-term CBR expectations and led to the cut,” Gazprombank noted of the government’s indirect role in regulator’s decision.

The next meetings of the CBR board will take place on April 28 and June 16.