RUB: Consensus has shifted towards rate cut – Commerzbank

The Central Bank of Russia's (CBR) had been expected to hold its key rate steady at today’s meeting. This had been a majority view among analysts, including ourselves, until recently, but as of late, the consensus majority has shifted in favour of a 100bp rate cut today. This shift could be driven by a combination of weaker economic news-flow, flattening inflation path – annualised inflation is finally showing better dynamics, decelerating to 9.78%y/y as of 26 May – and possibly, a gradual pricing-out of favourable scenarios relating to a peace-treaty, or removal of sanctions, which would have provided automatic growth support, Commerzbank's FX analyst Tatha Ghose notes.

USD/RUB and EUR/RUB to drift upward over the coming year

"Even as favourable scenarios are being priced-out however, the USD/RUB and EUR/RUB exchange rates stay fixed at low levels which they reached over the past quarter – this lack of any reaction probably reflects the ‘artificial’ nature of Russia’s exchange rates. Fundamentally speaking, there is not much justification for exchange rate strength right now: the oil price has settled a good $10/bbl lower than its erstwhile $70-75/bbl range and this has already impacted Russia’s oil and gas revenues (which fell by 35.4%y/y in May). Bank lending continued to slow down in April both for household and corporate loans – this is now a major driver of cooling demand."

"Of course, there are always some bullish counter-signals: the services PMI picked up in its last reading and retail sales and industrial output accelerated slightly, the latter because of defence spending. But on balance, the signs of economic slowdown are much more prominent. CBR itself has been acknowledging that this time the board might consider a wider range of options, leading some to predict even a 200bp rate cut. All this makes a rate cut the consensus favourite outcome now, even if not quite a done deal. If CBR does cut the rate, it will signal that the central bank realises that there is no further point in waiting for an external impetus from peace discussions or the like."

"In the US Senate and in the EU, further sanctions on Russia are being lined up, not the contrary – the EU is preparing its 18th sanctions package, which will target Russian energy and remaining sources of finance. We anticipate that a rate cut today will not impact the USD/RUB or EUR/RUB exchange rates, which are ‘technical fixes’ and recently have not moved even in response to significant geo-political developments. In the longer-term, we forecast USD/RUB and EUR/RUB to drift upward over the coming year."