The board of the Central Bank of Russia (CBR) left the key interest rate unchanged at 10% at its last meeting of 2016 held on December 16. This was in line with expectations and the inflation-minded regulator's firm previous guidance that excluded interest rate cuts until at least the second quarter of 2017.

The CBR did not exclude a cut in the first half of 2017 upon assessment of inflationary risks at the next meetings.

While the risks of not reaching the 4% inflation target have declined, the regulator still says the current disinflation trend needs to become more broad-based, as it still relies on short-term factors such as positive ruble dynamics and higher than expected oil prices, interest of foreign investors in Russian assets, and a good harvest.

Another risk is seen in higher government spending in 2017 from extra oil and gas revenues that might come from a sustained oil price rise at above $50 per barrel (estimated to bring over RUB1 trillion of extra revenues to the budget).

The CBR did not change its conservative oil price outlook of $40 per barrel for 2017-2019, expecting GDP growth at below 1% and capped at 1.5-2% in 2019-2019.

Of 30 economists surveyed by Bloomberg on December 15, 29 believed that the interest rate will stay at 10% as CBR governor Elvira Nabiullina recently reiterated that the next cut will be postponed until the first or second quarter of 2017.

A 4% inflation target for 2017 is still seen by the market as optimistic, but the bank did not noticeably toughen its rhetoric in the December 16 press release to curb market expectations, as it did at the September 16 meeting.

Deputy Minister of Economic Development Alexei Vedev forecasts inflation in 2017 at 4.3-4.4%, as cited by Reuters on December 14. Russia's largest bank Sberbank forecasts inflation next year at 5%.

Nevertheless, latest monthly inflation indicators (5.8% year-on-year in November and stable 0.1% weekly inflation) show that the central bank's target for 2016 is likely to be met.

"Flat weekly CPI at a level of 0.1% week-on-week implies that the annual figure will likely total 5.5-5.6%, reaching the lower bound of the CBR's target range," Gazprombank wrote in a note on December 15.