The Central Bank of Russia (CBR) decided to cut all of its key rates by another 0.25pp, effective as of today. The refinancing rate is now 10.5%, down from 13% in April, and the floor rate for one-day repo borrowing at auctions is cut to 7.5%. Although the timing of the rate cut was uncertain, the decision was widely expected. Inflation is on a downtrend – although fairly sticky – and there has recently been strong political pressure calling for lower rates from the central bank to support the real economy via lower funding costs. Going forward we look for two more rate cuts of the same size from the CBR during H2. We expect inflation to gradually drop to 11%. Going into 2010, there is limited room for further rate cuts, unless the fiscal stance is tightened significantly – and is something that could prove difficult.
The European Commission (EC) upped its forecast for Poland's economic growth in 2009 to 1% y/y (earlier it expected a 1.4% y/y contraction). The new forecast is in line with the Polish government's own expectation. The EC said that improved external demand would support growth in the coming months, while domestic demand is expected to remain sluggish due to deterioration in the labour markets.
Preview
The key event today will be Polish August inflation numbers. We expect a moderate downside surprise on inflation – down to 3.5% y/y from 3.6% y/y in the previous month. The consensus expectation is for unchanged inflation.
Trading update
The CEE FX-markets opened sharply lower after the weekend. CEE currencies were slashed from the morning following declining risk appetite in Asian trading and a stronger dollar (i.e. lower EUR/USD) – most notable was the depreciation of the Polish zloty, which at some point had lost 2% against the euro. However, during the day EUR/USD moved higher as global risk sentiment gained momentum and most CEE currencies regained lost ground.
In Russia there was very limited impact from CBR’s rate cut as it was widely expected. Overall the direction for short-end swap rates in CEE is down, as latest inflation data confirms that inflation pressures in the region are very moderate. The CBR warned that it sees increased risks of rouble volatility going forward – a view we share for the coming three to six months. Meanwhile, however, FM Kudrin said that he does not expect significant changes in the rouble FX rate over the next three years – maybe reflecting disagreement between government and the CBR. At the time that fiscal spending accelerates, we look for increased rouble volume.
