CBR likely on hold as RUB weakens

It would be premature for the Bank of Russia (CBR) to cut at this time. Inflation remains elevated at 15.7% y/y in September and it is expected to stay at the same level in October. Weekly inflation has picked up slightly due to recent RUB depreciation. 

A cut at this time would likely increase RUB vulnerability. This week Brent oil prices fell below $47 per barrel, causing the RUB to depreciate back to 65 after temporarily touching 62 earlier this month. 

"The CBR is likely to keep its key rate on hold at 11% for a second consecutive meeting on Friday (30 October). The Bloomberg consensus is split evenly between those calling for a cut and those that think the CBR will remain on hold", says Barclays.

Further RUB weakening could risk sparking renewed inflation pass-through. Recall that in July 2015, the CBR continued cutting rates while the RUB was weakening, which led to further deprecation and a reacceleration of weekly inflation.

An inflation targeting central bank cannot afford being too optimistic. It has to be disciplined and wait for inflation to decline before cutting rates. In the end, a disciplined central bank will achieve lower rates on a sustainable basis. 

"A cut now will risk losing the rate cut momentum as RUB weakness may reverse downward inflation trends. With very favourable base effects upcoming, we predict inflation will decline sharply during November 2015 - March 2016. The CBR will be able to resume cutting the key rate at its December meeting, provided the RUB remains relatively calm", added Barclays.