The Central Bank of Russia (CBR) kept the key interest rate unchanged at 10.5% at its policy meeting on July 29, citing a pause in the decline of inflationary expectations. A month earlier the regulator relaunched the monetary cycle easing with 50bp cut of the interest rate, the first in almost a year.
The decision to hold on monetary easing reinforces the CBR's position as a conservative inflation-minded regulator. This also asserts the central bank's independence under governor Elvira Nabiullina amid recent Kremlin demands to use monetary instruments to weaken the ruble.
The next meeting of the CBR will be held on September 16. Before the July 29 meeting analysts broadly expected it to cut the key rate by 50bp either now or in September.
However, the expectations quickly shifted towards the rate remaining on hold prior to the meeting. Out of 22 economists surveyed by Reuters, 18 expected the rate to stay unchanged. Sberbank CIB, which suggested that the CBR would cut the rate by 50bp, was the only Russian bank among four that expected this.
Most of the respondents that suggested the regulator will pause cutting the rate highlighted the recent ruble volatility, with Kremlin's "verbal interventions", falling oil prices, and ending of the tax payment period in July resulting in the weakest month fot the ruble this year.
“By leaving rates unchanged in July, the CBR is ensuring some insulation of Russia’s capital account from potential deterioration of the external environment in the coming month, thereby partially removing risks to the ruble exchange rate,” Gazprombank commented on July 29.
However, the CBR did not mention the rate of the national currency in the press release, noting only that the financial sector was stable. Even the world "oil", the main mover of the largest global energy exporter's currency was not mentioned in the press release for the first time in two years.
Some analysts suggested this was a deliberate avoidance by the regulator to engage in indirect debates on currency policy with the Kremlin after the CBR again clearly reiterated its adherence to flexible exchange rate.
Instead, the central bank focused on inflation and the influence of the lates economic trends on inflationary dynamics. The CBR commented in a press release that despite inflation "generally being in line with base-case targets", core and seasonally-adjusted inflation stopped the downward trend.
At the same time, weak domestic demand, slower tariff indexation, and a strong grain crop in the autumn are expected to curb inflationary expectations. The CBR still expects annual consumer price growth to slow to 5% by July 2017 from the current 7.2% and to 4% by the end of 2017, in "conditions of preserved moderately tight monetary policy".
The CBR said monetary and credit policy will remain "moderately tight", keeping real interest rates at a level that will not cause such demand for credit as to lead to inflationary pressure, while still facilitating saving.
“While the decision to keep the policy rate unchanged was in line with expectations, the wording of the CBR’s accompanying comment looks more hawkish,” Alfa Bank commented on July 29, noting the regulator's preoccupation with stalled inflationary expectations and the necessity of moderately tight policy throughout the press release.
The central bank also argues that the recent revival of industrial activity is not matched with revived demand, which leads to the growth of consumer prices. Along with external factors, fiscal uncertainty still poses risks to the 4% inflation target, the CBR warns.
"The Central Bank is required to keep the interest rates at a level that will facilitate savings, curb inflationary expectations, and ensure inflation curbing to the target," the press release said.
“While the next policy rate meeting [in September] was previously seen as a window of opportunity for another rate cut, we believe that the CBR’s comment signals that a more cautious approach will likely prevail,” Alfa concludes.
Gazprombank, in the meantime, still sees the pause in the monetary easing as creating an opportunity for some slowdown of inflation to levels below 7.0% y/y in September.
“Should this scenario materialize, we believe the CBR will have the opportunity to lower the key rate by 50bp at the September 16 meeting,” Gazprombank analysts wrote.
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