Russian policymakers, one month ago, were hinting that the pace of rate cuts might decelerate as rates had been lowered enough. However, their minds seemed to have changed after the last two CPI prints. Last week, the Central Bank of Russia lowered its benchmark rate by 50 basis points and hinted that further cuts are likely during their next meetings.
“A 25bp cut in December is now the market's base-case - as well as our own. The ruble did not weaken after Friday's decision because Governor Elvira Nabiullina had explicitly signalled a 50bp cut just days ago”, said Commerzbank in a research report.
The ruble has not had any negative impacts over monetary easing in the medium-term. CBR had an overly negative view regarding inflation at the start of 2019 and was also worried about second-round effects from a VAT hike – none materialized; harsh U.S. sanctions, which might devalue their currency.
The central bank then started to lower inflation forecasts progressively. It cut its end-2019 estimate to 3.2 percent-3.7 percent.
“Nevertheless, since CBR is cutting rates in response to a lower inflation outlook, this does not affect estimates of the prospective real interest rate in Russia, and hence, does not affect the exchange rate. We expect USD-RUB to drift slightly lower towards the 62.00 mark next year”, added Commerzbank.
