The Bank of Russia once again kept its key rate on hold at 11% today, on par with expectations. However, some analyst had expected a cut of 50bp, but the odds were close to 50%. The central bank noted that the macroeconomic fundamentals imply a less severe downturn than estimated earlier considering the oil price level. The CBR forecasts assume the economic downturn to slowdown in 2016 to 1.3%-1.5%. Moreover, it anticipates that between late 2016 and early 2017, the quarterly GDP growth rates will enter positive territory.

However, it appears that the reserve fund spending was the major argument to maintaining the key rate at 11%. Reserve fund spending covers the budget deficit. Therefore, t he central bank anticipates a softening of monetary conditions, affected by a narrowed structural liquidity deficit even if the interest rate is kept on hold. Moreover, there is slightly possibility of a wider budget deficit in 2016 that should be taken into account. Also the central bank believes that the rally in oil market will not sustain.

In general, the central bank’s statement is rather hawkish. The CBR state that “to enable the accomplishment of inflation targets, the Bank of Russia may conduct its moderately tight monetary policy for a more prolonged time than previously planned”.

The Russian central bank is likely to have sufficient freedom to resume easing policy in 2016, but the timing will depend on the budget policy and performance of RUB. After the rate decision, the ruble appreciation slightly as there was certain hope of an additional dovish step. Money market rates are expected to be stable with 3-month rates expected to continue to hover lower than 12% but with a potential to come close to 11% in H2 2016.