Central Bank of Russia likely to aggressively cut key rate by 50 bps in September – Nordea bank
Source: FxWire Pro - Commentary / 10 Sep 2017 08:38:23 Eastern Standard Time
Russian macroeconomic environment and external conditions have significantly rebounded since the previous CBR meeting on 28 July, which gives space for an aggressive key rate cut of 50 basis points to 8.5 percent on 15 September, noted Nordea Bank in a research report. Most of the short-term risks mentioned by the central bank as the reason for maintaining the key rate unchanged in July have not materialized.
Inflation spike in June to 4.4 percent was short-lived and inflation dropped to 3.3 percent on a year-on-year basis by the end of August. During its previous meeting, the CBR was worried if unusually cold weather at the start of summer would delay seasonal reduction in food and vegetable prices or eliminate it all together. Uncertainty about the harvest was mentioned as one of the important short-term inflation risks.
In July-August as new harvest began to come to the market, seasonal deflation gathered momentum bringing inflation below the 4 percent target. The most recent data from the Ministry of agriculture shows that this year’s harvest would be comparable to last year’s figures. The core inflation is also at historically low levels, reflecting a widespread character of inflation slowdown.
Inflation expectations that had risen to 10.7 percent in July fell to a historically low level of 9.5 percent in August. A sustained fall in inflation expectations is considered by the CBR as the primary precondition for anchoring inflation around 4 percent. The dynamics since the start of 2017 indicates that the Central Bank of Russia tends to proceed to the key rate cut when the gap between inflation expectations and the key rate narrows to 1 percent to 1.2 percent. This gap amounts to just 0.5 percent giving space for an additional aggressive cut.
In spite of the expected higher pressure on the Russian ruble due to rising geopolitical risks, RUB has been one of the best performing EM currencies since the start of August, stated Nordea Bank. Current high gap between the key rate and inflation is one of the reasons behind this trend.
Retail sales dynamics that stayed subdued also underpin the case for an aggressive cut. A lower key rate would raise the effect of traditional fundamentals on the RUB restricting potential for further strengthening.
“Despite current slowdown of inflation ahead of schedule, mid-term inflation risks (oil price dynamics, increasing pressure on the labor market due to demographic factors, recovery of consumer demand, high inflation expectations) are still present. Thus, the CBR is likely to reiterate that moderately tight monetary policy is still warranted”, added Nordea Bank.
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