Bank of Russia is back to dovish “pre-sanctions” rhetoric

The Central Bank of Russia (CBR) decided to cut its key policy rate by 25bps to 7.5%. Given the CBR’s rhetoric, we expect further rate cuts.

CBR forecasts annual inflation to reach 4% (neutral rate) by mid-2020. The statement’s wording effectively echoes the statements made before Rusal designation in April 2018, implying things are back to business as usual.

Quite a dovish tone, above market expectations, marks a policy U-turn.

We confirm our forecast, whereby the CBR is likely to make two consecutive 25 bps cuts this year. Assuming no harsh sanctions from US against Russia coming this year, the way is open for further easing.

If geopolitical risks won't deteriorate further, the CBR will continue dovish policy and make more cuts until mid-2020, bringing the key refinancing rate to 6.5% or even lower, from current 7.5%.

Sluggish economic growth and continuing deterioration in consumer demand due to accelerating slump in real disposable incomes despite falling inflation have offset the effects from the VAT hike in January earlier than was expected by the CBR, leaving little room for higher inflation.

Such dovish tone is not supportive of the rouble, but it is clearly justified, given the strong potential for higher OFZ prices on the back of Russia’s obvious fundamental credit advantages against its peers, which, unlike FX-debt, remain significantly undervalued, assuming no tough US sanctions are in sight.

The rouble is picking up following the rate decision.

Please click the link to read our note “Russia’s key rate cut — the start of high season?!”

Искандер Луцко
14.06.2019