CBR highlights downside risks to inflation; 25bp rate cut unlikely to weaken the ruble, says Commerzbank

The Central Bank of Russia’s (CBR) Governor Elvira Nabiullina spoke at a conference yesterday where she highlighted downside risks to inflation and the additional room now available for CBR to cut rates faster, according to the latest research report from Commerzbank.

The central bank’s next monetary policy meeting will be on October 25; while the majority of analysts expect no change in the benchmark rate, Commerzbank lean towards a 25bp cut, with further expectations of another 25bp cut in December.

CBR's previous policy guidance had been that following three rate cuts already this year, the pace of rate cuts could now slow down.

Because of this, many market commentators assume only one more 25bp cut in December. We, however, think that the combination of softer-than-expected inflation, and the more worrying news of downgrade to the fixed investment and GDP growth outlook (because of delays in infrastructure projects) means that the likelihood of a rate cut in October has increased.

Russian CPI inflation fell from 4.3 percent y/y to 4 percent already in September. CBR has cut its 2019 inflation forecast in two significant steps already and now predicts 4-4.5 percent for year-end 2019 – this estimate is highly likely to be revised lower again – in fact, Nabiullina appeared to confirm this directly yesterday, the report added.

"A 25bp rate cut would not weaken the ruble in our view because CBR is only adjusting to the inflation trend, not lowering the real interest rate," Commerzbank further commented in the report.