CBR likely to cut key rate by 25 bps to 8.75 pct as trend inflation slows further, says Danske Bank

This Friday at 12:30 CET, the Central Bank of Russia (CBR) is due to announce its monetary policy decision. On the back of Bloomberg’s most recent poll, it is expected that the CBR will cut the key rate by 25 basis points to 8.75 percent, while consensus has tilted towards ‘unchanged’. However, the statement is expected to express a more cautious tone. Markets are pricing in a full cut for the September meeting.

While inflation diverged from the CBR’s 4.0 percent y/y target, climbing to 4.4 percent y/y in June, the CBR considers the acceleration to be temporary and sees CPI hitting its target by end-2017. While monitoring inflation expectations remains crucial to the CBR’s decision making, the situation in June was more or less unchanged versus May.

Poll inflation expectations remained unchanged, while there was a marginal rise in observed inflation. The CBR has plenty of room for cautious cuts as the real rate remains far above the acceptable corridor of 2.50-2.75 percent. At the same time, moderate cuts are favourable for narrowing the RUB’s divergence from oil price fluctuations.

"We expect the real rate to hover around 3.0 percent in 2017, still attracting carry traders. Given current pricing by markets, a 25 bps cut would result in a temporary RUB weakening, which would result from a confirmation of the CBR prioritising monetary easing further," Danske Bank commented in its latest research report.

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