The board of directors of the Central Bank of Russia (CBR) cut the key lending rate by 0.25bp to 9.0% a year, the regulator said in a press release on June 16.

"The Board notes that inflation is close to the target, inflation expectations keep declining, and economic activity is recovering," the CBR said. "Inflation risks were down in the short term, while they remain in place in the medium term."

"The Bank of Russia sees room for cutting the key rate in the second half of 2017," it added. The Russian ruble slightly grew against the dollar and the euro on the news.

"The regulator expressed the view that 2H17 presents the possibility for further key rate cuts," Alfa Bank commented on June 16, believing that "at the four remaining policy rate meetings the CBR will continue to consider not so much whether or not to cut, but rather the scale of key rate reductions".

For Alfa, the key surprise in the CBR accompanying press-release was the strong focus on internal factors. 

"In our view, the tighter-than-expected Fed rhetoric as well as the US Senate discussions to intensify sanctions against Russia were important reasons in deciding against a 50 bp rate cut today, however, these factors were not even mentioned in the CBR comment," Alfa notes. 

Alfa sees such CBR rhetoric as an attempt to deflect the market’s focus from exchange rate dynamics and to delink inflationary expectations from the ruble trend. 

Gazprombank on June 16 also attributed the modest 25bp cut to the toughening of sanction
rhetoric, as well as deterioration in sentiment on commodity markets. Previous analysts surveys showed expectations of 50bp interest rate cut. 

The CBR sees inflationary risks stemming from harvest possibly suffering from cold weather conditions, the potential VAT increase, and the decline in oil prices despite the prolongation of Opec+ deal, Gazprombank notes.

"Thus, although the text of the statement directly indicates that the CBR sees room for key rate cuts in 2H17, we do not regard this as a sign that the monetary authorities have decided to revise the expected medium and long-term dynamic of the central bank’s key rate," the bank argues, forecasting that the key rate will be cut to 8.5% by end 2017.

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