CBR to keep rate on hold following disappointing inflation

Russian macroeconomic conditions have soured again just as the Bank of Russia (CBR) approaches a rate decision on Friday 11 December. It is a familiar sequence of events. Global oil prices have declined to new lows, causing RUB depreciation and raising concerns about the possibility of an additional round of pass-through pushing inflation higher. Other factors that will push inflation higher, are the sanctions Russia placed on imports of fruits and vegetables from Turkey and possible administrative obstacles to other Turkish imports. It is beleved the CBR will keep its 11% key rate on hold at this meeting, delaying the beginning of cuts until the January or March meetings. The split consensus leans towards a CBR hold in December.

Russia inflation has disappointed in Q4. After having dropping to just 0.35% m/m in August, monthly inflation increased for three consecutive months reaching 0.80% m/m in November, an annualised rate of 10%. Headline inflation remains elevated at 15% y/y in November.

"We expect December inflation to decline to 13.0% y/y due to base effects. This is the upper range of the CBR forecast (12-13%) made in September. Following this, we expect steep declines in headline inflation in Q1 16 as base effects become even more powerful. However, monthly inflation could remain elevated due to recent RUB depreciation",says Barclays.

Overall, it is too soon for the CBR to reinitiate rate cuts, in our view. Instead, before cutting its key rate, the CBR should wait until headline inflation drops and the run rate of inflation slows considerably. In our opinion, sustained monthly inflation of 0.5-0.6% m/m would be sufficient to justify cutting. This will be possible if global oil prices stabilise (or rise), thus facilitating RUB stabilization.

"We expect the CBR to begin cutting rates in 50bp increments at either the January or March rate-setting meetings. We expect that the CBR will continue cutting over four meetings for cumulative 200bp to 9%. At this time, we think the risks are skewed towards adverse inflation developments and further delay cuts from possible negative political or economic developments", added Barclays.