Bank of Russia to keep key interest rate on hold

The Russian central bank, during its monetary policy meeting on Friday, is likely to keep its key ate on hold at 11%. The stronger RUB and depreciating RUB volatility are opening space for a softer stance by the central bank, as disinflation is likely to continue calming down inflation expectations. The Russian ruble, following the recent oil rally, appreciated 9.5% against the USD and 9.6% against the EUR in the last 30 days.

The Brent oil price rose 6.5% in the same period. As anticipated, the Russian ruble was the best play amongst oil producers on an increase oil price. And it is expected to subdue price increases further, particularly given the high base effect. As the Central Bank of Russia maintained its key rate during its last meeting in January, the statement was surprisingly hawkish. It did not want to set limits for its hawkish statement, saying that if inflation risks increase, the central bank cannot rule out tightening its monetary policy.

“Given the current disinflation trend, whether or not it is supported by the crude price staying above USD40/bl, we expect the CBR to cut 50bp on 29 April. In our view, the total cut in 2016 will be minimum of 100bp, which would support the restoration of economic growth in 2017 at the earliest”, says Danske Bank.

However, any prolonged tightening is believed to depress the Russian economy and banking sector in the future. If the CBR holds its policy rate, the RUB is unlikely to be significantly impacted.

“We expect the RUB to adjust further to the current oil rebound, strengthening moderately against the USD over the next three months, to 68.50 and 67.00 in 12M. In the long run, we believe the RUB rate will get further support from a solid current account surplus, the first shoots of economic growth and continuing deleveraging of the corporate sector”, says Danske Bank.