Russia's central bank goes dovish

• Russia’s central bank cuts its key rate by 200bp to 15%.

• We expect USDRUB to climb over 75 within 1M.

• We expect Russia’s economy to expand only after 2016.

Assessment and outlook

Today (30 January 2015) Russia’s central bank unexpectedly cut its key rate to 15% from 17% p.a., while consensus expected the rate to stay unchanged. The main reason given by the central bank for the cut was that the previous hike by 650bp in December 2014 calmed inflation and depreciation expectations. The central bank expects a further decrease in the CPI due to falling economic activity. Inflation has climbed from 6.1% y/y in January 2014 to 13.1% y/y as of January 2015, mostly due to the rapid depreciation of the rouble and Russia’s counter-sanctions, but the CBR expects inflation to fall under 10% y/y by January 2016.

Despite rising economic activity in December 2014 due to consumers’ hedging of their savings by buying durable goods, Russia’s central bank expects that annual GDP growth will shrink 3.2% y/y in H1 15 as the oil price has dropped and western financial markets are closed to Russian borrowers.

The rouble fell 3% to 71.80 against the USD in the first 30 minutes after the decision, but recovered a bit, probably due to the central bank’s possible FX interventions. We expect that the rouble will be actively trying to what we estimate as its equilibrium price of 75 against the USD, given the current oil price. New sanctions and the escalation of fighting in Eastern Ukraine will be adding a ‘fear premium’ to that level.

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 into deep recession this year (we expect GDP to fall -7.9%), with a further -0.8% y/y fall in 2016. Yet, in current conditions 200bp is still a small cut to help lending growth and support economic activity. We expect CPI to rise to 20% y/y in H1 15, which leaves no space for further monetary easing. The next meeting of the central bank on the key rate is scheduled for 13 March 2015.