The Central Bank of Russia (CBR) on April 28 announced it is cutting the key interest rate by 50bp to 9.25%, above earlier expectations.
In March, after managing to curb inflation to its lowest level in post-Soviet history, the CBR made the first rate cut since August 2016 (by 25bp to 9.75%) and signalled the beginning of a softer monetary cycle.
However, early signs of consumer demand revival and a number of one-off factors resulted in notable weekly inflation acceleration in the first three weeks of April. While analysts were expecting a 25bp cut maximum, the 50bp decline came as a surprise.
VTB Bank on April 28 drew three conclusions from the CBR’s decision. The bank believes that “nothing that happens less than a week before the BoD meeting matters much (and weekly inflation estimates do not matter either)”, and that “each decision is discretionary, as the guidance given at the previous meeting is tentative, never a commitment”.
VTB also doesn’t see a big difference between core and non-core meetings of the CBR’s board in terms of what decisions can be made.
In its accompanying statement, the CBR expressed confidence that the 4% inflation target will be reached in 2017, even given the remaining inflationary risks.
The CBR still sees domestic demand as having disinflationary effect, with households sticking to the savings behaviour model. Consumption spending is expected to rise gradually, as real dynamics and retail crediting remains weak.
Alfa Bank sees the CBR’s unexpected move as a sign that “concerns over the substantial deceleration in the inflation rate is deeper than communicated to the market”, arguing that the “inflationary trend thus far in 2017 has turned out to be unpredictable”.
Alfa warns that declining predictability of inflation seen in April “complicates the CBR’s ability to guide the market”.
Given that the central bank in its statement admitted persisting inflationary risks, Gazprombank on April 28 said that the larger scale of the rate cut was attributable to the regulator’s intention to ease risks related to a significant inflow of portfolio investment to the Russian market.
By the bank’s estimates, in the first quarter non-residents expanded their presence on the OFZ federal bonds market by RUB250bn (€4bn), which accounts for around 80% of total placements over this period and the share of non-residents on the market reaching a record-high 29%.
Gazprombank believes that the CBR wanted to alleviate the currency market risks stemming from high interest rates attracting portfolio investment which could potentially increase uncertainty.
Indeed, financial market volatility was outlined by the central bank as the main inflationary risks along with global commodity market volatility, including the renewed Opec oil cut talks. On the other hand, the CBR welcomes the intention by the government to install the “budget rule” which would cut the mid-term risks for consumer prices.
The CBR said it will continue to monitor the inflationary, output, and oil price dynamics, but the “total potential for rate cuts in 2017 remains unchanged”. The next meeting of the regulator’s board is scheduled for June 16.
The “unchanged rate cut potential” phrasing and the fact that the comment regarding further potential rate cuts at upcoming CBR meetings disappeared from the text of the press release support Gazprombank’s cautious expectation that the key rate might total 8.5% by year end.
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