• Central Bank of Russia likely to cut key interest rate by 25 bps in February – Nordea bank

    Source: FxWire Pro - Commentary / 05 Feb 2018 15:23:04   Eastern Standard Time

    The Central Bank of Russia is set to meet this week for its interest rate decision. According to a Nordea Bank research report, the CBR is expected to cut its key interest rate by 25 basis points to 7.5 percent given additional reduction in inflation expectations in the midst of comparatively favorable RUB dynamics and sluggish economic activity indicators.

    The upcoming meeting will take place in an upbeat external environment. Oil price is far exceeding the Central Bank of Russia forecast. Moreover, the economic environment internally is favoring the continued monetary easing as well.

    Inflation in Russia has slowed further, deviating more from the central bank’s 4 percent target. Inflation is expected to reach its minimum in year-on-year terms in January and will begin to accelerate in February due to a low base effect, stated Nordea Bank. Even if the inflation trend would possibly begin moving upward in the near future, it will not pause the central bank’s easing cycle as inflation is expected to be below the 4 percent target by the end of 2018.

    Meanwhile, expectations for inflation have gradually aligned better with the 4 percent inflation target. The headline inflation expected for one year ahead remained virtually the same. But the share of surveyed individuals believing that at the end of 2018 inflation would be much higher than targeted 4 percent has dropped from 58 percent in December to 47 percent in January. Inflation expectations for one month ahead have also rebounded.

    The Russian ruble has appreciated 3.6 percent since December CBR meeting. Continued RUB strengthening restricts upward inflation pressure. Meanwhile, economic activity continues to be sluggish giving the reason for additional key rate cuts, said Nordea Bank.

    Significantly, recent comments from the CBR Governor hint at possibly more rapid rate of bringing the key rate to the neutral level of 6 percent to 7 percent.

    “We still stick to our current forecast of the key rate at 6.75% at the end of the year. However, in case of favorable inflation expectations dynamics the key rate could drop even lower”, added Nordea Bank.

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