Russia: Central bank cuts rate in cosmetic move

• Russia’s central bank cuts its key rate by 100bp to 14%

• We expect USDRUB to stay under 70 for 1M

• We do not exclude the key rate dropping under 10% in H2 15

Assessment and outlook

The CBR, Russia’s central bank, cut its key rate today (13 March) to 14% p.a. from 15%, as consensus expected (we expected the rate to stay unchanged) while the market had priced an approximate 150bp cut. The main reason given by the central bank for the cut was that ‘the balance of risks is still shifted towards a more significant cooling of the economy’. The central bank also declared it is ready to cut further on slowing inflation.

As inflation continued to accelerate in February from 15% y/y in January to 16.7% y/y, and the inflationary pressure has continued since, we see the cut as purely cosmetic, effected mainly due to political pressure. In recent months, critics of the CBR’s aggressive monetary policy to curb inflation and support the rouble have strengthened.

This resulted in the replacement of the first deputy responsible for monetary policy in January. The latest two rate cuts will please the critics, but will not change the situation in the real economy much, as rates for corporate rouble loans have stayed far above 20% p.a.

The rouble spot rate was volatile in the morning before the rate decision, but has not changed significantly after the cut, remaining a combination of the oil price and the occasional geopolitical premium. As the Brent average price improved in the last 30 days to almost USD60/bbl from USD55/bbl in January, we expect USDRUB to stay under 70 for one month, but we remain bearish in the long run.

We welcome the decision to cut, as last year’s aggressive monetary policy has caused a massive monetary contraction and is likely to send the Russian economy deep into recession this year (we expect GDP to fall -7.9%), with a further -0.8% y/y fall in 2016. As we expect CPI to slow to 11% y/y by the end of 2015, we do not exclude the key rate falling under 10% in H2 15 as the central bank follows through on its new stance.