CBR rate decision preview: cutting gently

We expect a 50bp cut in the key rate on 31 July
Key rate to drop under 10% in H2 15
CBR to favour moderate weakening in RUB

Assessment and outlook

This Friday (31 July) at 12.30pm CET, Russia’s central bank (the CBR) will announce its monetary policy decision. We expect a 50bp cut in the key rate to 11% p.a. in line with consensus. Since the last meeting on 15 June, the CBR has signalled that it will maintain its dovish stance while the path will become more moderate in order to avoid excessive volatility on the FX market. Despite the fact that CPI remains very high, hitting 15.3% y/y in June, and continues to damage the economy through its impact on private consumption, long-run expectations are clearly on the downside. The CBR announced its CPI forecast for June 2016 looking for annual inflation to fall under 7%, reaching the 4% target in 2017.

Despite the slowdown in the monetary easing path and given four upcoming monetary policy meetings in 2015, we expect monetary policy to remain dovish, pushing the key rate under 10% by end-2015. Thus, our forecast target should be reached smoothly despite a possible ‘hold’ decision on 11 September.

Following the Iran deal and the turmoil in China’s stock market, which have recently pushed commodity prices lower, the falling oil price has dragged the rouble down. Within the last 30 days the Russian currency has lost more than 4% against the US dollar. Yet, the rouble remains the best performer YTD in spot return among other EMEA currencies. Despite the recent weakening, the CBR purchased USD200m of FX daily ‘to replenish’ FX reserves. However, it stopped buying as USD/RUB reached 60.00 as we expected. Thus, we do not think the CBR is too worried about the reserves given its 5-year target of USD500bn. The only thing it is worried about is high volatility and the rouble strengthening excessively or weakening too fast. We do not expect any significant impact on the rouble from a 50bp cut. However, rates remaining on hold should support the rouble in the mid term.

We continue to expect moderate weakening within the next six months to 65 against the USD. The major upside risks for our USD/RUB forecast are the Fed hiking more aggressively than expected and a continuing fall in the oil price.

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