CBR cut the rate to 7%, another 25 bps reduction ahead in 2019

The Bank of Russia made its third consecutive interest-rate cut at today's meeting at 13:30 despite August volatility in the currency markets. Overall, the regulator’s tone was neutral.

The cut has largely been priced in due to the recent statements by the governor and accelerated inflation slowdown. The CPI has dropped to the lowest since December 2018 in August, 4.3% yoy. We forecast the gauge to reach 4% by year-end. Another reduction is expected in December — by 25 bps, to 6.75%.

When deciding on the key rate the regulator will look at the real and expected inflation against the target, economy’s performance on the forecast horizon, as well internal and external risks and their impact on the financial markets.

Putting rate on hold — pros

  • The policymakers highlighted elevated inflation expectations and global economy slowdown risks
  • CBR believes changes to fiscal spending and the use of the national wealth fund’s liquid part above 7% threshold may impact medium-term inflation
  • Rising trade tensions and other geopolitical factors
  • A pick-up in fiscal spending, including higher investments in 2H19

Cutting the rate — cons

  • CRB suggests the risks of inflation growth and slowdown remain balanced
  • The regulator has cut its year-end inflation forecast to 4.0–4.5%, from 4.2–4.7%
  • Inflation is slowing down amid household incomes and retail trade turnover stagnation
  • The labour market does add to inflationary pressure
  • The regulator has cut its FY GDP forecast to 0.8–1.3%, from 1–1.5%