CBR rate decision: continued, careful easing

• Russia’s central bank cuts its key rate by 50bp to 11.0%

• We see the key rate dropping to 9.0% in H2 15

• We expect USDRUB and OFZs to keep pricing further easing

Assessment and outlook

Russia’s central bank cut its key rate today (31 July) to 11.0% from 11.5% p.a. as we and consensus expected. The main reasons given by the central bank for the cut were “the considerable cooling of the economy despite a slight increase in inflation risks”. This reinforces the direction and credibility of monetary policy following the CBR’s U-turn in early 2015 as the economy started to shrink. The CBR reiterated its CPI forecast for June 2016, stating that annual inflation will fall under 7% and reach the 4% target in 2017. As of 27 July, CPI had climbed slightly on increased tariffs to 15.8 y/y as expected. We view the CBR’s call on inflation as extremely dovish, supporting the further easing of monetary policy.

The statement after the decision again sounded dovish and the CBR emphasized the importance of economic growth in monetary decision making. That was not as visible in their previous communication. The CBR expects the decrease in Q2 15 GDP “to be more significant than that in Q1 15” when it fell 2.2% y/y. We expect Q2 15 GDP to shrink 4.5% y/y. The CBR expects fixed investments to contract further and praised the buffer effect amidst the recession of the freely floating rouble, which is supporting exporters. In its June statement the CBR expected the economy to shrink 3.2% y/y in 2015. However, the central bank stated today that the forecast “may be revised downwards”. We still expect Russia’s economy to fall 6.2% y/y in 2015 whether or not the Brent average price for 2015 exceeds USD60/bbl.

While today’s cut was expected by us and the consensus, the falling oil price and new sanctions by the US against Russia have put additional pressure on the rouble. As we expected, this week the CBR stopped its FX purchases once USD/RUB reached 60.00. The rouble strengthened after the halt in purchases then fell after the cut in the key rate to 61.00 against the USD. Russia’s sovereign bond OFZs welcomed the cut with OFZ 02/27 rallying 1.5%. Yet, as continued easing had been priced, the rally was subdued. We expect the rouble to weaken moderately in the long run, pricing gradual further rate cuts. We expect fair value to stay around 65.00-68.00 against the USD given the current oil price. We expect the CBR to renew its FX purchases to replenish reserve funds if the oil price rebounds and USD/RUB dives under 60.00.