Russia's central bank unleashing ‘doves'

On 26 November, Russia's central bank governor Elvira Nabiullina gave a dovish speech. Speaking to Russia's senate, she signalled clearly that the regulator is ready to ease its monetary stance from H2 15, as broadly expected by the market. According to Nabiullina, the central bank plans to start expansionary monetary policy 'as soon as inflation and inflation expectations show they are slowing'. The central banker expects consumer price inflation to start heading down as soon as Q2 15, as 'the impact of temporary factors will be played out'. We also expect the CPI to hit its maximum in Q1 15 (9.2% y/y on average), easing to 8.5% y/y on average in Q2 15 as the rouble's devaluation is fully reflected in prices and the economic recession causes private consumption to shrink in 2015. 

Nabiullina unleashed another ‘dove’, saying that the central bank ‘will not fight inflation at the expense of the economy’. This shows its clear understanding that permanently tightening monetary policy in Russia would not prevent accelerating inflation but mostly slash economic growth. As we have been saying, inflation in Russia does not have monetary roots so far but it is rather a derivative of structural imbalances in the Russian economy and the rouble rate, particularly in the country’s large cities. However, in recent months, the CPI has climbed on Russia’s food imports ban introduced in August 2014 as a counter-measure to Western sanctions.

Given the more dovish tone of the central bank, we reiterate our expectation for the next rate decision on 11 December (key rate unchanged at 9.50%) but do not exclude the possibility of a 50bp hike in Q1 15. We estimate the CPI will accelerate clearly over 9% y/y in Q1 15, up from 8.3% y/y in October 2014. On the other hand, the pressure to support the rouble with rate hikes on the falling oil price vanished as the central bank moved to a freely floating rouble. As seen previously, a total 400bp rate hike in 2014 has not helped the fall of the Russian currency. We expect the first rate cut late in Q2 15.

Polish central bank stays in limbo

Even though deflation in Poland deepens every month, the Polish central bank (NBP) has downplayed its continual undershooting of its inflation target of 2.5% +/-1pp. Indeed, in its latest inflation forecast, the NBP forecasts that inflation will be below the inflation target all next year. Despite this, the NBP is reluctant to cut interest rates further. Therefore, we expect the NBP to stay on hold at next week’s RPP meeting and maintain the key policy rate at 2.00%. This said, we expect the NBP to ease monetary policy quite aggressively next year.