Russia's rate cuts continue at more moderate pace

The CBR cut its key rate by 100bp to 11.5%. The CBR again cited falling inflation together with the cooling economy as justification for lowering the rate. The CBR expects contraction in consumer demand and the recent RUB appreciation to keep inflation on a downward path, falling from 15.8% y/y in May to reach 7% in Mid-2016, and it repeated its prediction of 4% inflation by end-2017. 

The CBR notes that monetary/liquidity conditions remain tight with M2 money supply growth restrained (at 6.2% y/y, but above May levels). The CBR indicated it is ready to cut rates further but noted inflation risks in the next few months, presumably because of utility price hikes.

Barclays notes, according to CBR forecasts the economy will decline by 3.2% in 2015. It expects that the large contraction in consumption and investment will be offset by improving net exports reflecting the steep decline in imports. In 2015 it expects growth to recover to +0.7% in 2016 if oil prices recover to $70, but decline by -1.2% if oil prices remain at $60.

According to Barclays, "the CBR is likely to continue to cut rates during the remainder of 2015 and into 2016. If it expects inflation to decline to 7%, it may be aiming for rates to reach 8.5-9%. The pace of cuts is likely to slow depending on the exact path of inflation. A 50bp cut at end-July is expected and for the rate to reach 9.5% at end-2015".

Risks to inflation are from planned July increases in utility prices and possible RUB selloff if the CBR continues to purchase FX to restock its reserves.