CBR rate decision preview

This Friday (11 December 2015) at 11:30 CET, Russia's central bank (the CBR) is due to announce its monetary policy decision followed by a press conference. The key rate is expected to be lowered by 50bp to 10.50%, while consensus recently changed its view to 'no change'.

"We believe the CBR will finally resume its monetary easing after a prolonged pause, as disinflation continues and as 2016 inflation figures are set to fall significantly due to the base effect and low economic activity. Despite a resumed weakening of the rouble earlier this week following OPEC's decision to abandon production limits for its members, RUB volatility remains relatively low, while USD/RUB 3M at-the-money option volatility levels are 25% lower than the local maximum in August 2015",says Danske Bank.

On the other hand, a 50bp cut is more under pressure versus several weeks ago as recent geopolitical developments could fuel inflation expectations. Russia recently introduced sanctions against food imports from Turkey as a response to the Russian bomber aircraft being shot down on 24 November 2015. The CBR expects the impact of the sanctions on inflation to be limited. It expects it to account for a 0.2-0.4pp increase in inflation and to have an insignificant impact on the mid-run CPI forecast.

It is believed that by ignoring weak economic prospects and enhancing its focus on inflation expectations with rouble volatility, the CBR may face a vicious circle: tight monetary policy together with a weak oil price is likely to depress economic activity further while having no impact on inflation of non-monetary origin nor on a weak RUB, which follows the crude price and global EM sentiment ahead of the Fed's rate decision in December.

Gradual monetary easing is expected and the key rate is set to fall to 7% in late 2016, which would support the restoration of economic growth. However, any prolonged tightening would be very destructive for Russia's economy, raising downside risks for our 0.5% y/y GDP expansion call in 2016.

"We do not see any significant impact on the RUB if the CBR cuts its policy rate. We see OFZs benefiting further from anchored expectations on resumed monetary easing. We expect the RUB to weaken moderately against the USD over the next three months to 71.00 and 73.00 in 12M. In the short run, we expect the Fed's tightening to weigh on the RUB and emerging markets assets globally. In the long run, we believe the RUB rate will be determined by the oil price, current account surplus and economic growth", added Danske Bank.