CBR likely to stand pat in October, to remain hawkish over 2016

The Central Bank of Russia is expected to keep its key rate on hold during its meeting on 28 October, according to a Danske Bank research report. The market consensus is also anticipating the central bank to keep the rate unchanged. In spite of inflation slowing down continuously, stabilized RUB and lowered inflation expectations, the central bank is expected to remain hawkish this year.

During its meeting in September, the CBR highlighted that ‘the current key rate needs to be maintained till end-2016 with a possibility to lower it in Q1-Q2 2017’. This is seen as the cornerstone of the central bank’s message on Russia’s short-term and medium-term monetary policy, stated Danske Bank.

Russia’s external conditions have continued to rebound since summer 2016. Volatilities globally have dropped, whereas markets have re-priced the likelihood of Fed raising rate during its December meeting.  This factor might be seen as driving the Russian central bank’s cautiousness in 2016. But, too strong a ruble might add weakness to the central bank’s tone during the upcoming meeting.

While Russia’s internal economic turmoil is decelerating, rebounding news on the demand and real wage growth front are dull. It is an evident sign for the CBR to lengthen its hawkish stance to remain in line with attaining the 4 percent inflation target by the end of next year, said Danske Bank.

The Russian ruble is unlikely to react strongly after the upcoming meeting.