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The Bank of Russia Board of Directors decided to keep the key rate unchanged at 11%. High inflation risks which stem from the weak rouble are in focus. On the other hand, the risk of the economy cooling will force the CBR to ease policy in 2016.
The central bank made a very tough decision and remained in wait-and-see mode. During the last few weeks the RUB has depreciated sharply driven by oil market dynamics, and corresponding inflation risks prevented the bank from easing policy this time.
It is clear that this time a still volatile rouble and the corresponding high inflation risks weigh on the CBR. The latest weekly data were to some extent disappointing, showing a 0.2% pace of CPI growth, which is slightly above expectations. Also, it was very difficult for the CBR to decide to cut rates taking into account the coming Fed decision next week and corresponding risks of new pressure on the RUB.
However, because of the high base effect, inflation will likely contract from the current 15% to ~10% in the beginning of 2016; this will push the CBR towards easing policy in 2016. According to the CBR the external trade restrictions imposed against Turkey from January 2016 will not have a significant impact on consumer prices. These restrictions are estimated to add 0.2-0.4% point to inflation till the end of 2015 and in early 2016. According to the Bank of Russia's forecast, annual consumer price growth will stand at about 6% in late 2016, on track to reach the 4% target in 2017, facilitated by the current monetary policy. On the other hand, the CBR acknowledges that the economy needs stimulus. According to Rosstat's estimates, the annual pace of GDP decline decreased in Q3. However, the mixed dynamics seen in core macroeconomic indicators for October suggest that this trend is unstable, with household consumption being the weakest part.
The CBR expects that investment activity will remain weak amid the persistent economic uncertainty and the relatively tough lending conditions. Net exports will be a positive contributor to annual output growth.
"The RUB decreased after the decision but this dynamics can be attributed to intraday oil market slump. USDRUS is trading at 69.7. Money market rates will remain stable with 3-month rates likely to continue to hover below 12% with potential to move close to 11.5% in Q1 2016. We expect inflation at 8% by the end of 2016',says Nordea Bank.
