Central Bank of Russia likely to cut key rate by 25 bps in June, says Danske Bank

The Russian central bank, Central Bank of Russia (CBR) is set to announce its monetary policy decision next week. According to a Danske Bank research report, the central bank is likely to lower the key interest rate by 25 basis points to 9 percent. Consensus expectations are also for the key rate to be lowered by quarter percentage point; however, consensus has recently become more divided between a cut of 25 basis points and 50 basis points. Markets tend to price in more dovish moves by the central bank.

While headline inflation has been coming close to the central bank’s 4 percent year-on-year target rate, disinflation stopped in May due to rise in prices of vegetable and fruit. It remained at 4.1 percent, missing economists’ expectations.

The central bank’s task is not mainly to reach the target, but also to anchor it, stated Danske Bank. Food inflation is likely to accelerate due to the colder-than-usual spring. The CBR usually takes actions in advance to control any acceleration in prices that are caused by the supply side shock. The central bank’s governor Elvira Nabiullina stated in early June that the CNR is cautious in how it approaches the rate cuts as the central bank still has high inflation expectations. These mentioned factors favour a rate cut of 25 basis points.

Meanwhile, there are few factors that are in favour of a 50 bps cut. Expectations for inflation are dropped further for the third straight month. Nabiullina stated recently that either a 25 basis points and 50 basis points cut is likely on 16 June. Meanwhile, RUB’s decoupling from the oil price continues, which is pushing crude price under RUB 2,800. This might be challenging for the budget in the long term. But Brent average has stayed over RUB 3,100 in the 2017 year-to-date, while rate cuts by the CBR have not led to any considerable sell-off in RUB.

“We continue to expect the CBR to deliver 25bp 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”, said Dankse Bank.

Meanwhile, the real rate is likely to hover around 3 percent this year, still attracting carry traders. The key rate is expected to be lowered to 8 percent by the end of this year and to 7 percent by the end of 2018, added Danske Bank. Given the dovish pricing by markets, a 25 basis point cut would result in a temporary strengthening of RUB on the central bank’s reconfirmed cautiousness.