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Citi See CBR Cutting Rates by 100bps

RUSSIA
  • The conditions that forced the CBR to cut the policy rate from 20% to 11% over the last two months remain in place. The central bank has shifted focus to the more traditional objectives of inflation and inflation expectations, which have been surprisingly stable in recent months.
  • Despite having recently upgraded our forecast for GDP, it will still be deeply in negative territory. All this continues to argue the case for more rate cuts, albeit at a much more modest pace than we have seen in recent months. We see a 100bpts cut to 10.0%.
  • Slowing economic activity also argues in favor of another rate cut. We upgraded recently our 2022 forecast for GDP growth to -5.5% from -9.6% previously. This significant improvement was related to incoming data, which pointed to a smaller negative contribution to growth from consumption and a stronger-than-thought contribution to growth from net exports.
  • Our new full-year forecast anticipates that 2Q to 4Q GDP growth contraction will still be a significant 8.5%YoY. There are already some emerging signs that the economy has started to face stronger headwinds in Apr and May, with retail lending losing steam. The preliminary assessment of GDP growth in Apr suggests that it has contracted by an estimated 3.0%YoY.
  • Better-than-expected inflation and inflation expectations, increasing challenges to growth and the now stable financial system could make a convincing case for the CBR to cut again. However, the cut could arguably be smaller than the three previous rate decreases of 300bpts each, as the policy rate has now been already brought much closer to its pre-late Feb level.
  • There are slight risks of a larger cut to 9.50%. We also anticipate that there will be more scope to cut the base rate to 9.0% by the end of the year.
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