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The Central Bank of Russia (CBR) is expected to cut the key rate by 25 basis points to 9.50 percent, as does consensus, at its monetary policy meeting scheduled to be held on April 28. CBR governor Elvira Nabiullina signalled last week that rate cuts of 25 and 50 basis points may be discussed at the meeting as inflation hit 4.1 percent y/y as of April 17. In March 2017, the decline in inflation expectations resumed and the real rate remained elevated.
Russia’s Ministry of Finance’s (Minfin) FX purchases do not seem to be restraining the RUB’s excessive strengthening or bothering the CBR with the risk of a sudden increase in inflation expectations. As Minfin estimates oil and gas revenues have deviated from the budget assumption by RUB65 billion in April (RUB92 billion in March 2017), it is currently buying daily FX of RUB3.5 billion (approximately USD61m per day) versus RUB3.2 billion in March 2017.
Thus, in total, Minfin plans to buy FX for RUB70bn between April 7 and May 5. This is not currently having a significant impact on the markets. Thus, a more dovish than expected CBR could help to put the brakes on the RUB.
"We continue to expect the CBR to deliver 25 basis points in cuts at the meetings in 2017, as the crude oil price is set to increase moderately, lowering inflation expectations and balancing the oil price in RUB. We continue to expect the real rate to stay over 3.0 percent in 2017, attracting carry traders and oiling current long positions in RUB. We expect the key rate to be cut to 8.50 percent by end-2017," Danske Bank commented in its latest research report.
