Bank of Russia likely to keep benchmark rate on hold

During the Bank of Russia’s monetary policy meeting tomorrow, the central bank is likely to maintain its benchmark rate at 11%, said Danske Bank in a research report. The Russian central bank is likely to have a softening tone underpinned by enhanced external conditions on projections of a postponement of Fed rate hike, stability in the Russian ruble and increasing oil price. The CBR is expected to have a softening tone in spite of disinflation ending. However, the central bank’s wariness is being supported by the waning of high base effect this time.

Recently, the Russian ruble spot has considerably diverged from the crude rally, bolstering on average 0.3% against the US dollar and declining 0.8% against the euro in the past 30 days. In the same period, the Brent oil price average rose 9.3%.

The market is also not expecting the central bank to lower rates tomorrow, highlighting that there are downside risks to the projection, noted Danske Bank. During the April meeting, the Bank of Russia’s tone was slightly softer than before. The central bank had introduced conditionality to restart easing of policy if risks for inflation decline to a level that ensures with “a greater certainty that the Bank of Russia achieves its inflation target” that continues to be at 4% y/y by late 2017. In May, Russia’s inflation reached 7.3% y/y.

“We expect inflation to accelerate to 8.1% y/y at the end-2016 on a low base effect, while the CBR is also seeing ‘elevated inflation risks’”, added Danske Bank.

The CBR governor Elvira Nabiullina has repeated her concerns in the past few weeks regarding the increasing risks of inflation if the Finance Ministry’s fiscal discipline is not strict enough. She has also cautioned that a sharp reduction in the benchmark rate might push up inflation without creating considerable economic growth.

The Russian central bank is expected to start preparing the market in its statement for a reduction in interest rate in July if the external conditions continue to rebound on the same trajectory, according to Danske Bank. But any reduction in oil price and worsening of global risk sentiment might move the rate cut to the fourth quarter of 2016. The CBR is expected to cut the rate to 9.5% by the end of this year, said Danske Bank. If the central bank maintains its policy rate at 11%, RUB is unlikely to be impacted considerably.

Meanwhile, the constituents of consensus have become divided with nearly half of contributors believing the central bank to lower rates by 50bp on Friday. If the CBR lowers rates on Friday, the RUB is likely to witness a negative reaction, albeit temporary. The optimism on the forthcoming economic growth is likely to gather momentum on lower rates in the second half of 2016.