CBR rate decision: unchanged, blame the oil

• Russia’s central bank keeps its key rate unchanged at 11.0%.

• The CBR lists new ‘scapegoats’: oil, China and the Fed.

• The CBR does not rule out further tightening.

• We expect 2016 GDP to shrink 2.1% y/y.

Assessment and outlook

Russia’s central bank kept its key rate unchanged today (29 January) at 11.0% as we and consensus expected. The main reasons given by the central bank to hold rates were ‘another oil price slump’, high levels of consumer price growth rates and a higher risk of accelerated inflation despite continuing disinflation. The CBR estimates that inflation will fall below 7% y/y in 12 months from the latest 12.9% y/y (December 2016) while reaching a 4% y/y target by late 2017. According to the CBR, January 2016 inflation is falling to approximately 10% y/y.

As pro-inflationary pressure increases on RUB’s recent weakening, the CBR blames oil, the slowing Chinese economy and Fed’s rate hike for increasing the likelihood that inflation may accelerate in Q2 16, mentioning that ‘should inflation risks amplify, the Bank of Russia cannot rule out a tightening of its monetary policy’. Thus, we believe that resuming monetary easing could easily be postponed to H2 16 if crude does not rebound significantly (over USD40/bl). We see the current extra hawkish monetary stance continuing to depress Russia’s economy, especially the banking sector, worsening the momentum in the environment of low oil prices.

Surprisingly, this time the CBR did not mention any risks from Russia’s trade restrictions against Turkey while the last time the central bank estimated that the tension will add 0.2- 0.4pp to inflation up to early 2016. We maintain our view that the geopolitical environment is not yet set in favour of sentiment improving towards Russian assets.

The next rate meeting will be held on 18 March 2016. We expect the CBR to remain hawkish and keep rates unchanged if the oil price stays low.

RUB is following the oil price

The rouble weakened 0.9% against the USD and 0.7% against the EUR within an hour of the decision while the Micex stock index fell 0.3% as markets remain pessimistic about Russia’s economic prospects. We expect 2016 GDP to fall 2.1% y/y if crude’s year average stays at USD31/bl.

Given the continuing oil price weakness, we remain bearish on the RUB, expecting the USD/RUB to hit 82.00 in 3M, 84.50 in 6M while sliding to 72.00 in 12M as the country’s current account surplus remains strong.

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