CBR rate decision preview: spring doves

• We expect a 100bp cut in the key rate on 30 April 2015.

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

• We expect USDRUB weakening to continue to its fair value.

Assessment and outlook

This Thursday (30 April 2015) at 12.30pm CET Russia’s central bank (the CBR) will announce its monetary policy decision. We expect a 100bp cut in the key rate to 13% p.a. in line with consensus. During the last meeting on 13 March 2015 the CBR had already signalled that it is ready to cut on slowing inflation as ‘the balance of risks is still shifted towards a more significant cooling of the economy’. Despite the fact that the CPI levels remain very high, hitting 16.9% y/y in March 2015, and continue to damage the economy through their impact on private consumption, weekly price rises have not exceeded 0.3% and long-run expectations are clearly on the downside. In January-February weekly CPI posted 0.7% on average. The CBR expects inflation to fall to 9% y/y in March 2016 and to 4% y/y in 2017.

On the other hand, economic growth entered negative territory during Q1 15 as fixed investments shrank y/y for the 15th month in a row, retail sales growth y/y has been negative YTD and loans growth has significantly slowed down. Looking back at the rate decisions earlier in 2015, there is a clear U-turn in the CBR’s monetary policy from previous absolute inflation targeting to checking economic developments. Thus, we expect the dovish monetary policy to go on pushing the key rate under 10% by end-2015.

As the rouble strengthened more than 16% YTD against the USD, Brent’s price in roubles has become too low to keep Russia’s budget balanced in 2015. Thus, fiscal discrepancies have increased, imposing pressure on the government. Since March 2015 the CBR has also appeared concerned about the overvalued rouble. The central bank has raised the cost of FX funding several times to curb the strengthening of the Russian currency. It succeeded in calming the strengthening, which lowers the probability of a more dovish rate cut on 30 April.

We do not see any significant support to the rouble from Russia’s macro fundamentals and expect moderated weakening within the next six months to over 62 against the USD. However, ECB’s quantitative easing is supporting rouble assets and rate-cut expectations are pushing yields on OFZ local bonds down.