Factors that support CBR to hold in July

There are several supporting factors that weigh in favour of keeping the key rate on hold this month. The CBR appears quite determined to keep its FX purchase programme in place and would probably prefer to keep interest rates higher than to forego the daily purchases. 

Pausing in July will give the CBR more time to assess financial market trends. If the RUB were to stabilise and inflation were to drop more than expected, the CBR could react later by cutting interest rates more rapidly. If instead oil prices continue to fall and the RUB is under more pressure, the CBR could remain on hold for more meetings to help support the RUB and limit the inflation pass-through.

According to Barclays, the supporting factors are:

• First, In mid-May the CBR initiated daily FX purchases and since then has added about $1bn to its reserve each week. This is putting a strain on the availability of FX on the market, weakening the RUB further. 
• Second, the CBR has already reduced its key rate considerably, by 550bp since January to 11.5%. While further interest rate cuts could help the economy recover, it is doubtful that a delay of a few months will have a large effect on economic growth. 
• Another consideration is that the government has increased utility prices this month (by an average of 7.5%), causing a temporary increase in the level of inflation. July inflation will accelerate to 15.9% y/y (from 15.3% in June) following three months of declines. 

"The pause will not signal an end to the rate-cut cycle. The CBR will cut its key rate during the upcoming year and could resume cuts as early as its next meeting in September", added Barclays.