CBR rate decision: consistent easing

• Russia’s central bank cut its key rate by 150bp to 12.5%.

• We see the key rate dropping under 9% in H2 15.

• We expect USDRUB to keep pricing further easing.

Assessment and outlook

Today (30 April 2015) Russia’s central bank (the CBR) cut its key rate to 12.5% from 14% p.a. Together with consensus we had expected a 100bp cut. The main reason given by the central bank for the cut was ‘lower inflation risks and persistent risks of considerable economy cooling’ which reinforces the direction of the monetary policy taken after CBR’s U-turn in January 2015. Since then, the central bank is seriously taking into account economic developments rather than purely targeting inflation. The statement after the decision sounded dovish again pointing out that ‘as inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate.’

The recent rouble appreciation is curbing inflation clearly under 17% y/y. The CBR expects annual inflation to decrease to under 8% in 12 months which keeps the door open for significant rate cuts in 2015. We expect the key rate to drop under 9% by the end 2015. However, we see CBR’s inflation target at 4% for 2017 as unrealistic.

Today’s cut wasn’t a big surprise to the markets as the rouble has become exceptionally strong for the budget and economy given the current oil price. The new trend in monetary policy is positive for the economy and for financial markets. However, the easing effect will not be seen in the real economy until 2016 at the earliest even if we do not see geopolitical woes coming into the main picture. We expect the rouble to weaken moderately in the long-run gradually pricing in further rate cuts. We estimate the rate against the USD to stay around 61 in the short term. We also expect OFZ yields to continue the recovery to last year’s lowest levels.