As expected the Central Bank of Russia (CBR) cut its key rate by 25 bp to 7.5% per annum — the first cut since March 2018, the regulator said in a press release following the board of directors meeting on June 14.

"On 14 June 2019, the Bank of Russia board of directors decided to cut the key rate by 25 bp to 7.5% per annum. Annual inflation slowdown is continuing. In May, households’ inflation expectations and business price expectations did not materially change and remain elevated. Economic growth in the first half of 2019 is lower than the Bank of Russia’s expectations. Short-term proinflationary risks have abated compared to March," the regulator said.

At the last meeting of April 26 the CBR resolved to keep the key interest rate unchanged at 7.75%, but allowed for a cut in the rate as soon as the second quarter. Out of 32 analysts surveyed by Reuters, 29 expected the key rate to be cut by 25bp to 7.5% on June 14.

The ruble slightly strengthened against the dollar and the euro on the Moscow Stock Exchange after the CBR's decision to lower the key rate, according to the Moscow Exchange data.

The weekly inflation data as of June 10 showed weekly inflation at zero for the second consecutive week, and annual inflation trending at below 5%. The analysts in Reuters survey expected the CBR to lower the inflation target corridor for this year to 4.7%-5.2%. The CBR overshot the expectations and lowered the inflation forecast for 2019 to 4.2%-4.7% after cutting the rate, while reiterating the medium-term target of 4%.

The CBR also allowed for further rate cuts in 2019, while moving to neutral monetary-crediting policy by mid-2020. The next policy meeting is scheduled for July 26, although this is not an anchor meeting accompanied by a press-conference. 

The regulator is under pressure to cut rates to boost growth which has been extremely weak in the first quarter. GDP growth was only 0.8% y/y in the first three months of this year, way below even the most pessimistic forecasts and the economy is stagnating.

In its latest report on Russia the International Monetary Fund (IMF) argued that the CBR should not wait too long to restart the monetary easing cycle, as currently the "monetary policy stance is estimated to be moderately tight." 

"A delay in reducing rates would increase the likelihood of subsequently undershooting the inflation target next year," the fund warns, noting that in 2019 inflation has so far been trending below the CBR's targets. IMF sees "inflation reaching the 4% target in early 2020, under a declining path for the central bank’s policy rate." 

"In our view, the only major risk for the Russian economy on the radar is a rise in volatility in global markets; however, the fiscal rule and high nominal rates in Russia help to mitigate this," VTB Capital recently commented.

The CBR "may signal that, because of higher global risks, the next cut will come only in several meetings. In our view, if global markets remain more or less stable, the CBR will make another 25bp cut only in December," VTBC wrote on June 3.

Indeed, while inflationary outlook became more favorable, the CBR could be put off by early signals that the government could loosen the fiscal policy. The regulator could also take a more conservative stance on sanction risks, to balance out government's relative calm on the issue indicated by recent announcements of possible expansion of foreign borrowings.