Russia CBR to continue cutting, but at a slower pace

The Bank of Russia (CBR) is likely to cut its key rate 100bp to 11.5% at its meeting on Monday 15 June. This is a slower rate than the 150bp cut at its May meeting. The CBR is in slightly less of a hurry to cut rates at this meeting and it will further reduce its pace of cuts pace to 50bp in subsequent meetings, says Barclays. There is a slight risk that it will cut by only 50bp at this meeting, added Barclays.

The cut cycle is mainly the result of an overshoot in December 2014 when the CBR raised its policy rate to 17%. At that time, the RUB was depreciating rapidly and clearly overshooting. Declines in global oil prices and Western sanctions that limited external financing for Russia had created a shortage of FX that led to a RUB selloff. The CBR raised its key rate at a specially called meeting to help stem RUB depreciation while protecting its FX reserves. Once the RUB selloff pressures ended in 2015, the CBR began cutting rates and subsequently RUB appreciated for several months, facilitating further cuts. More recently, the RUB has entered into a depreciation stage that may cause the CBR to be more cautious.

Headline inflation remains high at 15.8% y/y in May; however, this no longer justifies high policy rates. Inflation has been declining for three months after peaking in February. Weekly inflation has been quite low for the last 10 weeks at an annualized rate of about 5%. It appears that all the pass-through of previous RUB depreciation is completed and that the recent appreciation is bringing inflation lower. In addition, the economy has entered into recession that is exerting downward pressure on prices, with nominal wages virtually flat. 

Barclays predicts, inflation will continue declining during 2015, reaching 12% at end-2015 and falling into single digits in 2016 and the CBR will lower its policy rate to 9.5% at end-2015.