CBR rate decision preview: time to resume easing

This Friday (30 October 2015) at 11:30 CET Russia's central bank (the CBR) will announce its monetary policy decision. Economists expect the key rate to be lowered by 50bp to 10.50%, while consensus is split between a 50bp cut and no change.

It is believed that, CBR will resume its monetary easing after a pause in September 2015, as inflation acceleration has stopped after a marginal rise in August 2015 when Chinese woes weighed on the RUB and consumer prices. At the same time, the RUB posted 3.1% in spot returns against the USD in the 30 days to 28 October, gaining on better news from China and markets' expectations on a postponement to Fed hiking. Together with the stabilising oil price, these factors reduced the RUB's volatility and provided additional room for resuming monetary easing, which has been badly missed by businesses and consumers among the current economic recession.

Economists saw the latest statement released after September's decision being cautiously dovish despite unchanged rates as Russia's economic prospects look weak. Yet, cautiously trying to justify its latest 'on hold' decision, the CBR did not clear enough anchors to the markets. Analysts conclude that the CBR left an open question: are inflation expectations more important in the CBR's decision making than economic cooling? This was a change from its previous communications, which enhanced the importance of economic risks and less inflation. However, it is believed that political pressure on the CBR to cut rates has increased and the central bank's attention will be drawn away from inflation expectations at its next meetings"

"We expect the key rate to fall to 10% this year and to 7% in late 2016, which would support the restoration of economic growth. In our view, any tightening would be very destructive for Russia's economy, while it would not prevent possible RUB weakening if the oil price continues to fall", says Danske Bank.

There will be significant impact on the RUB if the CBR cuts its policy rate. It is believed that OFZs is set to benefit further from anchored expectations on monetary easing. Yet, do not exclude a marginal RUB strengthening effect from possible monetary easing, as, in Russia's case, the markets have been interpreting rate cuts as RUB supportive on improving economic prospects rather than seeing cuts as diminishing carry opportunities.

"We expect the RUB to weaken temporarily against the USD over the next three months to 70.00, as we expect the Fed to start tightening its monetary policy in Q1 16, weighing on emerging markets assets globally", added Danske Bank.