The Central Bank of Russia (CBR) is expected to resume the cautious monetary easing cycle and cut the key interest rate by 25-50bp on the next meeting of the board of directors on October 27.

The CBR resumed the monetary easing cycle with a widely expected 50bp key interest rate cut on September 15 to 8.5%, but despite overshooting the inflation target well ahead of schedule the regulator remained cautious and did not give away any definite clues for further rate cuts. In the past weeks CBR officials have said that the cut in the range of 25-50bp is likely to be considered at the next meeting.

VTB Capital said on October 25 that CBR's previous guidance had said that the decisions would be influenced by the risks of a material and persistent deviation from the inflation target, and how observed inflation and economic activity perform relative to the CBR’s own forecasts.
The bank argues that the CBR does not consider the current inflation undershoot to be either persistent or sizable and thus will opt for a more modest 25bp key interest rate cut.

On the week of October 17 to 24 weekly inflation in Russia inched to 0.1% after remaining at 0% week-on-week for the preceding six weeks, Rosstat agency said on October 25. Nevertheless, Gazprombank is anticipating a 50bp cut to 8% from the CBR on Friday, which would be more aggressive than the market expects. 

"Earlier we also expected a reduction of just 25bp, but since the last CBR meeting inflation has unexpectedly declined by around 50bp to 2.7-2.8% y/y, while the positive surprise on the grain harvest and the lifting of the embargo on tomato imports from Turkey limit the scope for acceleration of CPI until year end," Gazprombank argues.

The full-year inflation could total at about 3%, which leaves the CBR more space to aggressively lower rates in the short term before the expected price growth rebound in the beginning of 2018, Gazprombank believes.

The CBR expects inflation to end 2017 at 3.5-3.8%, while the Ministry of Economic Development that needs lower interest rates to help its ambitious 2.1% growth outlook expects 2.7-3.2% inflation in 2017.

Still, Gazprombank predicts that the CBR will toughen the rhetoric for 2018 after an aggressive cut on October 27, as the longer-term inflationary risks arguably worsened somewhat due to faster growth in household consumption relative to income and increased reliance on retail lending.

"Moreover, the ruble’s increased dependence on portfolio investment inflows to OFZs [federal bonds] ahead of the likely tightening of US monetary policy requires support from heightened real rates," the bank argues.