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As expected, the Russian central bank (CBR) lowered its key rate by 25bp to 7.25% on Friday. It has already lowered its inflation outlook considerably in June: for the end of 2019, it expects an inflation rate of 4.2-4.7%, for early 2020 it predicts a further fall of consumer prices to 4%. That gives it scope for further rate cuts - in particular as the Russian economy is stagnating and as monetary policy in the US and in Europe is going to be eased further.
We assume that the CBR will cut its key rate to 6.75% by year-end and to 6.0% by year-end 2020. That means its monetary policy would change from restrictive to neutral. (For your information: the central bank assumes that the neutral interest rate level, i.e. an interest rate that neither stimulates nor slows the economy, as being 6-7%).
On the flip side, the Fed rate cuts give the CBR scope to make full use of this range. The central bank did make it clear explicitly in its statement that the risk of capital outflow had been reduced significantly as a result of revised rate paths in the US and the eurozone. Despite the pending rate cuts the ruble is likely to find support as a result of the positive real interest rate levels.
Geopolitical risks continue to linger, and if were to materialize, could generate bouts of capital outflow pressure. With the budget rule in place, our economist forecasts the CBR to purchase around $67bn of FX on behalf of the budget rule in 2019, from the $100bn projected current account surplus.
This does not leave a strong buffer to deal with such potential capital outflow bouts. Accordingly, (at spot reference: 63.546 levels), we advocated Sept-19 USDRUB 63/68 1x1 call spreads, we now hold the same positions as further upside risks are foreseen. Courtesy: JPM & Commerzbank
