Central Bank of Russia likely to cut key rate by 25 bps in April, may cut rate to 8.5 pct by end-2017

The Russian central bank, the Bank of Russia, is set to meet on Friday for its monetary policy decision. The central bank is expected to lower the key interest rate by 25 basis points to 9.50 percent during its meeting, noted Danske Bank in a research report. However, a 50bps rate cut is note excluding to limit the Russian ruble’s excessive strengthening. Last week, CBR governor Elvira Nabiullina hinted that reduction of rate by 25 and 50 basis points might be talked about during the meeting as inflation reached 4.1 percent year-on-year as of 17 April. The decline in inflation expectations resumed in March, while the real rate stayed elevated.

Russia’s Finance Ministry’s purchases of foreign exchange do not appear to be limiting the RUB’s increasing strengthening or bothering the central bank with the risk of a sudden rise in inflation expectations. As the Finance Ministry estimates that oil and gas revenues have deviated from the budget assumption by RUB 65 billion in April, it is at present purchasing daily FX of RUB 3.5 billion as against the RUB 3.2 billion in March, noted Danske Bank.

Therefore, the finance ministry intends to purchase FX for RUB 70 billion between 7 April and 5 May. At present, this is not having any considerable effect on the markets. Therefore, a more dovish than anticipated CBR might assist in putting the brakes on the Russian ruble, stated Danske Bank.

The Central Bank of Russia is likely to cut its key interest rate by 25 basis points during its meetings this year as the crude oil price is expected to rise moderately, lowering inflation expectations and balancing the oil price in the ruble. The real rate is anticipated to remain over 3 percent this year, attracting carry traders and oiling current long positions in the ruble.

“We expect the key rate to be cut to 8.50 percent by end-2017. We do not expect a strong reaction in RUB after the meeting if the CBR does not deliver any surprise and its consistency holds”, added Danske Bank.

If the Central Bank of Russia lowers the rates over 25 basis points, the ruble’s weakening might be for a temporary period of time as lower rates in Russia have attracted flows through expectations of better economic prospects stimulating demand for both local stocks and debt, stated Dankse Bank.