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Moderation of Inflationary Pressure Gives CBR Room to Ease

RUSSIA
  • The Central Bank of Russia are expected to go further in the reversal of their emergency tightening cycle with a 100bps rate cut to 10.00% this week. A moderation in inflation as well as inflation expectations has given the bank space to further reverse the 1050bps emergency rate hike that followed the swathe of sanctions from the West at the onset of the Ukraine crisis.
  • Pervasive currency strength also argues in favour of easier policy, with the government’s FX restrictions on exporters over-achieving in the goal to limit capital flight – hence the gradual easing of these rules over the past few months as the domestic economic situation stabilises. Recent reports suggest the CBR were fully aware of the tightening contribution the stronger RUB made to the domestic economy, and the currency rally may have allowed the central bank to steer clear of tightening rates further than 20%, and has helped with the transition to easier policy (evident in the emergency 300bps rate cut at end-May).
  • With a stronger currency, moderating inflation expectations and an expected economic contraction this year, evidence suggests Russia will continue to reverse their emergency tightening not just at this month’s meeting, but further down the line, with many sell-side institutions eyeing a base rate as low as 6.00% later in the year.
  • Analysts are more divided over Friday’s decision, with some seeing the greenlight from the RUB and a looming credit crunch as justification for a larger than 100bps cut. Countering this, Goldman Sachs see a pause to the cutting cycle this month, with uncertainty surrounding the output gap and fiscal rules calling for the bank to adopt wait-and-see mode.
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