CBR PREVIEW: CPI Spike May delay CBR 25bp Cut to 1Q21

CBR PREVIEW 18/12/20 - 1030GMT / 0530ET

• POV: CPI Spike May delay CBR 25bp cut to 1Q21; Caution Prevails until CPI Moderates
• CBR is expected to keep rates unchanged at 4.25% following a short-term spike in inflation - forcing institutions to pare back November's cut and dry expectations for 25bps of easing at this meeting. Conditions since then have changed dramatically, and by the CBR's previous criteria for a 25bps cut (RUB appreciation & reduction in geopolitical risks), we should be seeing a cut Friday.
• However, a pronounced headline CPI overshoot in November (+4.4% YoY) on accelerated food inflation, robust loan growth & base effects outpaced the CBR's +3.7%-4.2% YoY end-year forecast by some margin - leading to reduced policy space at this meeting. Headline should peak at 4.9% YoY in Feb once the food supply shock and base effects subside, followed by a 2H21 moderation to 3.0% on expectations for a sustained output & consumption gap.
• Since end-Nov, the RUB has appreciated ~4% vs the USD on firmer oil prices and broadly accommodative global risk sentiment - which will be looked upon favourably by the CBR, but may not be enough to tip the scales towards a cut.
• Recent CBR comms point to a mixed to slightly hawkish tilt following months of dovishness. Nabiullina offset IMF pressure to cut below 4%, highlighting limited easing space, a "material" rise in CPI and poorly anchored expectations. Markets see 25bp of cuts still in the pipeline with Mosprime-3x6 RUB FRA spreads at 17.5bp (narrowed 7.5bp Dec 10) - but timing remains the primary concern.
• Hence, our base case is for a 25bp cut to be delayed until Feb/March, but cannot discount chances of a cut at this meeting. 4.00 is seen as the near-term floor to rates with vaccines expected to bolster 2H21 activity - offsetting the need for a deeper terminal rate (~3.5% as some expect) and augmenting CBR flexibility to future shocks