The Central Bank of Russia (CBR) kept the key interest rate at 10% at the year's first board meeting on February 3. This was in line with analysts' expectations, while the regulator said monetary policy will likely remain tight for at least the next five months.

"Given the change of external and internal conditions, the potential for lowering the key interest rate in the first half of 2017 has diminished," the CBR said in a statement.

"The tone of the statement was tighter than we had expected," Alfa Bank commented, reminding that this is a tighter rhetoric than in September 2016 when the CBR was guiding to consider a rate cut in first two quarters of 2017.

The CBR managed to more than halve inflation in 2016 to 5.4% year-on-year, but still sees risks for the 2017 inflaiton target of 4%. Current disinflation is still driven by one-off factors such as ruble dynamics and the good autumn harvest in 2016, while longer-term factors such as inflationary expectation remain inert and propensity to save declines. The central bank also noted elevated uncertainty in foreign policy and the external environment at large.

As expected, the CBR sees the start of FX purchases by the finance ministry as a short-term inflationary risk. The first forex transactions already had an effect on the ruble exchange rate after the ministry announced its plans on February 3 to spend RUB6.3bn (€99mn) a day on forex transactions from February 7 to March 6.

"The operations of the FinMin on the currency market will be taken into account when managing the liquidity of the banking sector," the regulator wrote, while still seeing the effects of such interventions on money market rates as "close to neutral".

"Although we treat the decision [by FinMin to purchase FX] as rational, the problem is that currency purchases could weaken the year-average exchange rate forecasts at certain oil prices by 3-4%" Renaissance Capital estimated on January 31, adding that "at an oil price of $50-55 per barrel, the risk is that we could see RUB66-64 per US dollar and 100-150bp interest rate cuts [this year] instead of RUB64-62 and 150-200bp rate cuts".

At the same time, the central bank welcomed the ministry's intention to channel the extra oil revenues into reserves, as this will weaken the dependency of Russian economy on oil price fluctuations, including inflationary dynamics, and will set the conditions for "stable and predictable" interest rate dynamics in the economy.

"We believe that the key internal reasoning behind the more hawkish stance is related to the declining potential of inflation-free catch-up growth in Russia," Alfa Bank argues, reminding that the Rosstat statics office recently revised its 2015-2016 GDP decline figures upwards.

The bank sees this as a signal of an erosion of the available output gap, which suggests that 2017 growth now looks to be more inflationary than previously assumed. "We believe this argument is strong enough to tighten the monetary approach," Alfa Bank analysts wrote.

The next meetings of the CBR board will take place on March 24, April 28, and June 16.

"The CBR's commentary was almost entirely in line with our expectations, but the wording that the chances of a key rate cut in 1H17 had decreased could mean that even our cautious forecast of a rate cut in April could turn out to be too optimistic," Gazprombank said on February 3.

"We do not exclude that under a foreign policy status quo scenario the first rate cut could occur no earlier than the June 16 CBR meeting," the bank now believes, noting that this could be a negative surprise for some market participants.