Russian central bank likely to adopt wait-and-see mode, may resume easing cycle in H2 2018

The extreme volatility of the Russian ruble in April has significantly changed the outlook of Russian economic activity and the actions of the Central Bank of Russia. Since then the ruble has found a new equilibrium level about 6.5 percent weaker than in early April. The softening does not look like a temporary one and might therefore pass through to prices. Forex dynamics usually influence prices with a lag of three to six months, noted Nordea Bank in a research report.

“We see quite a high possibility of the CBR resuming its easing cycle in the second half of the year. However, the magnitude of the easing will be smaller than we previously expected. We now see room for only two more cuts this year compared to three cuts previously”, stated Nordea Bank.

This episode of ruble pressure might actually be a good opportunity to reassess the degree to which the exchange rate affects prices and inflation expectations. The pass-through from the exchange rate to inflation at present is estimated at about 0.1 or even weaker, which suggests that last week’s RUB depreciation of 6.5 percent might cause inflation to rise by about 0.6 percentage point compared to the earlier forecast of 3.5 percent. In spite of a weaker RUB, inflation would therefore stay in the proximity of the 4 percent target this year, leaving some room for additional monetary easing in 2018. Inflation expectations are expected to rise back to the levels about 9 percent or slightly more compared to the current minimum of 7.8 percent.

The labor market is expected to stay on the CBR watch list as well. Real wages growth accelerated sharply at the beginning of 2018. Preliminary data for March imply that a considerable part of growth in January and February was set off by one-off bonus payments. If real wages growth stabilizes at this more adequate level, the likelihood of further key rate cuts in the second half of the year rises. For now, higher wages growth appears to translate into more savings rather than into higher consumption.

Recently CBR representatives commented on the likelihood of raising the neutral estimate for Russia due to a higher country risk premium after the second round of sanctions, stated Nordea Bank.

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