Russia: Central bank to cut key rate - Rabobank

According to analysts from Rabobank, the Bank of Russia is set to cut the key interest rate at the next meeting as inflation continues to decelerate. They see reasons to be optimistic that once President Putin gets re-elected in March, he will intensify efforts on making substantial economic reforms.

Key Quotes: 

“The Bank of Russia is set to trim the key rate at its first meeting this year scheduled on February 8 after inflation decelerated to yet another all-time low in January. With inflation likely to remain comfortably below the official 4% target in the coming months, the CBR has room for manoeuvre to ease monetary policy after the economy lost momentum in the second half of 2017. Until the rout in global stocks, which also weighed on oil prices, we would have argued for a 50bps cut. But, a large move would leave the ruble more exposed should risk aversion escalate further. It would be therefore prudent to opt for a measured 25bps cut to 7.50% on Friday.”

“The main reason why Russian policy makers led by Governor Nabiullina are very likely to lower interest rates is the broad-based disinflationary trend. Inflation surprised on the downside falling to yet another all-time low of 2.2% y/y in January from 2.5% y/y in December (the consensus expectation was for a fall to 2.3% y/y).”

“With inflation likely to end this year at around the official 4% target, the monetary policy easing cycle is set to continue in 2018 starting with a 25bps cut on Friday, although the CBR may opt for a 50bps move as it was the case in December.”

“Lowering rates would also provide the economy with some support after growth spluttered in the second half of 2017 resulting in disappointing annual expansion of 1.5% y/y - well below the 2.1% y/y anticipated by the Economy Ministry.

“There are reasons to be optimistic that once re-elected in March President Putin will intensify efforts on making substantial progress on economic reforms that would boost productivity and at the same time reduce reliance on global demand for Russia’s oil and gas. Capital inflows would likely accelerate on the back of firm commitment to reforms, which in turn would provide the ruble with an important source of support allowing the CBR to align the key rate with the neutral level seen at 6-7%.”