The Bank of Russia has delivered a rate cut, set for further easing

Bank of Russia has cut the rate in line with our forecast amid a faster real inflation slowdown (annual inflation in January slowed to 2.4%). Households and businesses inflation expectations remain moderate. Overall, the Central Bank has adopted a neutral stance, as it left its 2020 inflation target (3.5-4%), but the tone was very dovish hinting further cuts this year due to short-term disinflationary risk.

The key rate has dropped to the lowest since March 2014 (pre-sanctions level). Inflation has low since august 2018. Additional budget social spending and demographics announced in January won’t have a “considerable pro-inflationary impact”, the central bank said. 

Inflation slowdown drivers:

• Inflation is sliding faster than expected amid consumer lending slowdown and food and other goods and services prices decline yoy
• If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of a further key rate reduction at the upcoming meetings
• We expect next rate cut at the March 20, 2020 meeting
• The rate is projected to be cut by 25 bps, to 5.75%, if the global markets climate does not deteriorate, to 5.5% at the meeting on July 24 - and to 5.25% at December 18
• We expect two more cuts - to 5.25% if inflation slows down in line with the baseline scenario and global economy slowdown does not accelerate
• Trade wars risks have reduced 

Inflation growth drivers:

• The risks of a food market U-turn cannot be ruled out, since it is difficult to assess the correlation of temporary and permanent factors in this market
• Moreover, monetary policy easing may induce further upward pressure on inflation that tops CBR expectations
• The risks of further global economic slowdown remain, including due to geopolitical factors, increased global commodity and financial markets volatility, which could affect exchange rate and inflation expectations
• Coronavirus outbreak will fuel global uncertainty in the coming quarters
• Additional social outlays announced in January won’t have a “considerable pro-inflationary impact, but this year’s inflation trends will be shaped by the pace of budget spending, the central bank said

Inflation and key rate

Source: Bloomberg, ITI Capital