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Russian central bank likely to remain on hold due to inflationary pressures

The Central Bank of Russia (CBR) is largely expected to remain on hold at its monetary policy meeting scheduled to be held on July 29, following higher-than-targeted inflationary pressures that would restrict the bank from easing further.

Although there remains quite a number of reasons that support a rate cut by the central bank. However, over the past months, the fall in inflation has come to a standstill. At 7.5 percent, the rate of inflation remains above the CBR’s target of 4 percent for late 2017. Even though the underlying price trend is not far off the central bank’s target at 5 percent, the strong rise in nominal wages recently makes a further fall in inflation seem questionable at best.

However, the Russian benchmark interest rate remains one of the highest in the sphere of emerging market economies, at 10.50 percent. It, therefore, comes as little surprise that a number of analysts expect a renewed cut of the key rate for tomorrow. After all the CBR had stated that after the cut in June, further cuts were possible.

Further, the recent fall in the price of oil and the immediate ruble weakness is an alarm signal for the central bank. The appreciation of the ruble since the start of the year was mainly the result of the higher oil price. Without the notable appreciation, inflation would no doubt be higher now. A renewed depreciation could easily reverse this development, Commerzbank reported.

Contrary to the situation in June, a rate cut may undermine the central bank’s credibility on the financial markets. Prior to the rate cut in June the central bank had left interest rates unchanged for 1 year even at a time when the rate of inflation had been falling notably.

Moreover, the CBR’s credibility was not affected by the rate cut in June due to the cautious approach before the step. In case of a renewed cut within the space of six weeks, market expectations could change considerably. A further cut would point towards the CBR acting hastily. The market may quickly price in further rate cuts, with the usual effects for the currency.

"We nonetheless expect unchanged interest rates as the weighing of pros and cons is likely to cause the CBR to leave rates unchanged," Commerzbank commented in its report.

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