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The Central Bank of Russia (CBR) is expected to follow along the lines of easy monetary policy, cutting the benchmark interest rate to 8.00 percent by end-2017 and to 7.00 percent by late 2018. Given dovish pricing by markets, a 25 basis points cut would result in a temporary strengthening of the RUB on the CBR’s reconfirmed cautiousness.
While headline inflation has been approaching CBR’s 4.0 percent y/y target, disinflation stopped in May on the increase in fruit and vegetable prices. Inflation stayed at 4.1 percent, missing economists’ expectations. The colder-than-usual spring will accelerate food inflation due to a poorer harvest versus 2016.
The CBR usually acts in advance to curb any acceleration in prices, which are caused by the supply side shock. CBR’s Governor Elvira Nabiullina claimed in early June that "we are cautious in how we approach rate cuts because we still have high inflation expectations".
"We continue to expect the CBR to deliver 25 bps in cuts at the meetings in 2017, as the crude oil price is set to increase moderately, lowering inflation expectations and balancing the oil price in RUB. We expect the real rate to hover around 3.0 percent in 2017, still attracting carry traders. We expect the key rate to be cut to 8.00 percent by end-2017 and to 7.00 percent by late 2018," Danske Bank commented in its latest research report.
