The Bank of Russia (CBR) decided to keep its key rate unchanged at 11.0%, in line with forecast and the split consensus. The press statement and Governor Nabiullina's news conference provided a clear description of the CBR's views of the Russian economy; the new Monetary Policy Report will be released next week.

The CBR had previously been prepared to consider cutting rates as early as December, but explains that "the slowdown in consumer prices occurred somewhat slower than predicted." This apparently took rate cuts off the table. The reason for the worse-than-expected inflation performance was the steep decline in global oil prices, as the more pessimistic scenario of the CBR has been realised. Brent oil fell to $39/b from $50/b at end-October, at the time of the previous CBR rate meeting, leading the RUB to depreciate 69.5 from 64 at end-October. Given recent pass-through trends, this 8% depreciation could add about 2pp to inflation. This gives the CBR a reason to pause. Other factors pushing inflation higher are inflation expectations, Turkey sanctions and higher trucking tolls.

The CBR anticipates inflation to decline from the current level of 14.8% y/y (as of 7 December) to 13% at end-2015, below 10% in January 2016, 7.5-8% at end-Q1 16, and 6% at end-2016. If this path is realised, the CBR indicated it will be prepared to initiate a rate cut cycle at one of its next MPC meetings. The CBR repeated its goal of bringing inflation down to 4% at end-2017. According to the CBR, with tight monetary policy conditions in place, the factors bringing inflation lower are declining food inflation, more RUB stability (less pass-through inflation), weak consumer demand and base effects.

The CBR estimates that the lower oil prices put growth on a lower path also. The CBR expects the recession to continue through H1 16 and that positive growth will resume only in 2017. This is based on oil prices reaching an average of about $50/b during this period. If oil prices stay at their currently depressed levels the recession would be extended. The CBR is relatively optimistic with respect to the economy's ability to adapt to lower oil prices. The CBR notes that with RUB depreciation, the current account has increased in 2015 to an estimated $63bn and the CBR thinks it will stay elevated, covering capital outflows so that FX reserves remain steady. The economy is showing initial signs of adjustment, with certain export industries and import substitution industries showing expansion.

"We largely agree with the CBR's assessment of the Russian economy. Inflation is set to decline rapidly over the next four months mainly due to base effects. The rate of decline depends on weekly and monthly inflation. The CBR apparently wants these to be consistent with 7% annual inflation (around 0.5-0.6% per month), at which point it can start to bring its 11.0% key rate lower, probably in January or March unless further setbacks in the decline of inflation are encountered", says Barclays in a research note.