The board of the Central Bank of Russia (CBR) decided to cut the key interest rate by whopping 50bp (basis points) to 6.5% at its regular monetary policy meeting on October 25, the biggest cut of the year and marking the start of a bolder than expecting easing policy.

As reported by bne IntelliNews, the CBR was expected to make the fourth rate cut this year, especially after the head of the regulator Elvira Nabiullina said it was ready for "decisive measures". Still, most analysts expected merely a 25bp rate cut, although there was enthusiastic speculation that a 50bp cut was possible.

The CBR's bold move follows a week of other very big cuts amongst Russia’s Emerging Market peers. The National Bank of Ukraine (NBU) slashed rates by 100bp on October 24 on the back of falling inflation, while the Turkish central bank lopped off a huge 250bp, surprising many. As bne IntelliNews has reported, since Turkish president Recep Tayyip Erdogan changed the governor of the central bank earlier this year, rates have been cut by an extraordinary 1000bp.

The CBR’s cut was attributed to the inflation in Russia trending below the target and continuously but moderate economic growth. The CBR has also downgraded the inflation target for 2019 to 3.2-3.7% from 4%-4.5% previously and for 2020 to 3.5%-4% from 4%. The central bank’s target rate for inflation is 4%.

The rate cut represents a new direction for the central bank’s policy. Last year CBR governor Elvira Nabiullina had a war mentality making a pre-emptive rate hike in September to head of potential ruble instability as the US was expected to impose harsh new sanctions on Russia. The CBR together with the Ministry of Finance have been building a fiscal fortress to protect Russia’s economy from attacks. But with gross international reserves (GIR) over the CBR’s $500bn comfort level, a 2% budget surplus and modest growth, clearly the Kremlin feels secure.

As the geopolitical and fiscal risks subside, the analysts see the CBR as shifting to more dovish policy stance in the nearest future. Sberbank CIB that accurately predicted the 50bp cut wrote on October 25 that, "if the global backdrop remains benign, another 50bp [cut] may be coming in December [meeting]."

Sberbank also expects the CBR to revise the inflation targets downwards, and possibly even sees it reaching as low as 2.5% in 1Q20. "Such sharp cuts would support inflation at 3.0-3.5% in 2H20," the bank believes.

To remind, the CBR managed to bring down inflation from double-digit readings to a post-Soviet low of 2.3%-5% between the summer and the end of 2018. The inflation-minded regulator was generally inclined towards moderately loose monetary policy, but it had been thrown back by a worsening in sanctions and the external environment in April 2018.

Speaking of current geopolitical climate Tim Ash of Bluebay Asset Management wrote that "the message here from Russia, is that [President Vladimir] Putin has declared geopolitical victory on the US and the West," and that "no more reason to maintain uber cautious defences" allows the CBR to "focus on kick starting the Russian economy which is in the doldrums," which suggests a more dovish policy stance.