Russian central bank cuts key rate to 12.5%

By bne IntelliNews April 30, 2015

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The Central Bank of Russia (CBR) cut the key interest rate from 14% to 12.5%, reflecting the government stance that inflation is under control and growth is now the priority after months of economic recession.

This was the third decrease in 2015 since the rate was hiked to 17% in December as an emergency measure amid extreme ruble volatility.

In a first statement, the CBR cited diminishing inflationary risks, while those resulting from "substantial cooling of the economy" remain. Monthly consumer price growth was now in check because of ruble strengthening since February, it said, while consumer demand was much lower and there were good signs of stabilisation of annual inflation.

The 150bp rate cut was in line with expectations of a 100bp-200bp decrease reported in RIA Novosti and Bloomberg surveys. Like the central bank, analysts saw favourable conditions for further monetary policy easing as Russia pulls through the worst of the economic turmoil caused by a 50% drop in oil prices in the past year, and a similar slump in the ruble's value because of Western sanctions imposed over the Ukraine crisis.

But while monthly and weekly inflation consistently declined since March (slowing to 0.1% week-on-week as of April 27), yearly inflation hovered around 17% at the start of the month, and is only expected to fall to 12%-13% in the second half of 2015.

The central bank under governor Elvira Nabiullina believes inflation can still be reined in sooner, to reach an annual 8% by April 2016, and a 4% target in 2017. If inflationary pressures weaken as hoped there will be further cuts to the rate, said the bank's board of directors, which will meet again on June 15.

The extent of the cut was a little more than many analysts had expected. Twenty six out of 40 economists surveyed by Bloomberg expected a 100bp cut. Those predicting a deeper cut of up to 200bp were in the minority. 

“Sharp monetary easing will be a negative sign for foreign investors, indicating there won’t be further cuts in the near future,” Evgeny Koshelev of Rosbank told Bloomberg one day before the CBR meeting.

Vladimir Pantyushin of Sberbank CIB said in a note to clients that the CBR could be expected to maintain its gradual approach towards policy easing.

Previous statements by Finance Minister Anton Siluanov that the ruble's approach toward RUB50 to the US dollar was too strong, fuelled speculation that the central bank would opt for a stronger cut to decisively undermine the free-floated national currency rally.

The CBR, however, maintained a conservative position, forecasting a -4% drop in GDP in 2015, while the Ministry of Economic Development said it would revise its original -3% forecast to -2.8%. Already in March, however, the contraction was deeper than expected at -3.4% y/y.

Chief economist at BKS, Igor Tikhomirov, told Russia's Prime news agency that a 100bp key rate cut was already priced in and would not trigger a strong reaction in ruble rates.

The CBR already addressed ruble strengthening in recent days by doubling rates on repo facilities, thereby limiting local funding for carry trade on Russian assets that had fed some of the ruble's rally.

Analysts surveyed by Prime agreed that if the economic and political situation remains stable, the key may be cut back to 10% by the end of 2015.

Maxim Osadchiy, an analyst of BKF Bank, said the situation remains fragile as in the past two months the main risks have been muted: the geopolitical situation in Ukraine has stabilised, and oil prices started to pick up enough to lift the gloom.  


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