CBR likely to pause in July

Russia financial conditions have been changing as global oil prices have declined rapidly in recent months, down nearly 25% since early May. The RUB has accordingly been hit, down 22% since mid-May and depreciating more than 5% this past week alone. 

"This tips the balance in favour of a more cautious monetary policy. The RUB vulnerability and its possible impact on inflation make it unwise for the Bank of Russia (CBR) to cut its key rate at this time. CBR rate decision on Friday, 31 July can be no change. The CBR will keep its key rate on hold at 11.5%", forecats Barclays.

The financial risks from the RUB depreciation for monetary policy are significant. The RUB depreciation that has already taken place could add to inflation; a pass-through of about 20% is estimated during periods of one-way RUB sell off. 

Further, if oil prices continue to decline, as is possible, the RUB could be vulnerable to overshooting, as happened in separate incidents in December 2014 and January 2015. Oil prices are already lower than January levels and could drop further. Currency overshoot would put considerable strain on the financial system and probably cause further declines in growth.