Russia: CBR kept rate on-hold at 9% - ING

Dmitry Polevoy, Chief Economist at ING, notes that CBR kept rate on-hold at 9% citing short-term risks from food prices and geopolitics, but leaving room for rate cuts in 2H17. The CBR prefers caution, posing risks for our end-2017 call of 8.25%, he further adds.

Key Quotes

“The CBR decided to keep its key rate unchanged at 9%, in line with the market consensus but against our call of a 25bp rate cut. Comparing the comment with a similar one from the Jun-17 meeting, it is apparent that having explicitly referred to “no changes in the sources of mid-term risks” (we agree), the CBR has reacted to the short-term risks of (1) food prices and their impact on inflation expectations; and (2) geopolitical risks. It is worth noting that the reference to geopolitics is new since the Jun-17 meeting, reflecting the recent US Congress passage of the sanctions bill and, possibly, the most recent Russian decision to equalize the number of US diplomats to that working in the Russian embassy in the US and restrict usage of some real estate and warehouses in Moscow in a tit-for-tat move (after the initial US action in late-2016).”

“All in all, “extreme caution” is the focus at the CBR. It has always been easier for the CBR to under-deliver on rate cuts than to over-deliver in the uncharted waters of approaching the 4% target while having no track record of maintaining this target for long. A build-up of policy credibility looks natural in this environment, even though the retention of the “rate cut potential in 2H17” mantra flags the easing bias staying intact.”

“We have an 8.25% call for end-2017, assuming one pause in Oct-17. Now, with the pause in Jul-17, there are risks to our forecast, but for now we keep it intact awaiting the performance of inflation in Aug-17 as well as the latest developments in the never-ending Russia-US geopolitical saga. The CBR decision reminds us of the Feb-17 one when the CBR reacted to the short-term risks of the beginning of the MinFin purchases, but then eased the caution considerably and cut by 100bp in total over Mar-Jun-17. This time around the approach looks the same: wait and see the effects of food prices and sanctions on inflation expectations and actual CPI pace and then react accordingly. The retention of the forward guidance on rate cuts potential in 2H17 allows for future cuts, but the reference to data-dependency reserves room for longer pauses, if risks stay present.”