CBR preview: Adjusting to reality – Nordea Markets


Tatiana Evdokimova, analyst at Nordea Markets, suggests that the CBR is likely to revise its inflation forecast down and shift its rhetoric to a slightly more dovish mode.

Key Quotes                  

“Since the December meeting when the CBR last updated its forecasts, the EM currency index has increased by 2.6%, oil prices have recovered by 12%, Russian CDS has dropped by 21 points while 10-year sovereign bond yields have stabilised 0.26% points lower. The external environment has substantially improved thanks to a much softer Fed, continued trade negotiations and lack of progress in sanctions tightening.”

“Internal economic developments are also exceeding CBR’s baseline forecasts. Inflation response to the VAT hike remains moderate (with inflation at 5.2% y/y in February vs 5.5%-6% expected by the CBR for Q1). Inflation expectations seem to have peaked and are likely to gradually resume a downward movement in case of absence of new shocks. RUB appreciation (6.6% ytd, which is more than any other emerging currency) is also helping to keep inflation in check. Next week’s data about retail sales will be of particular importance to the CBR. January retail sales were weak (1.6% vs 2.9% in 2018) following the VAT hike. If this demand weakness persists for much longer, this will remain an important argument against further hikes.”

“Given that external conditions have significantly changed and the initial VAT impact on prices is weak, the CBR will likely revise its inflation forecast down and shift its rhetoric to a slightly more dovish mode. However, we don’t expect any promises to resume the easing cycle before Q4 given the generally cautious approach of the CBR.”

“While trade tensions remain unresolved, the CBR will probably keep a relatively cautious stance.”

“We believe that the key rate will remain stable at 7.75% for two more quarters with easing likely restarting in Q4. Several factors could potentially accelerate a resumption of the easing cycle. Sustainably better external conditions thanks to a trade deal or a faster-than-expected decline in inflation expectations are among them. The upcoming meeting will be followed by the press-conference of the governor.”

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