The CBR kept the interest rate band unchanged at its monthly monetary policy meeting today, in line with our and consensus' expectations. The refinancing rate stays at 8.00%, the one day REPO fixed rate at 6.25%, the one-day REPO auction rate at 5.25% and the overnight deposit rate remains at 4.00%. The next policy meeting is scheduled for the first half of July.
In addition, the CBR has cut the FX swap RUB leg rate from 8.00 to 6.50%, foreign-currency leg from 0.25%/1.00% (for USD and EUR, respectively) to 0.00% - targets stability of money market rates.
The decrease in the FX swap RUB leg rate is fully in line with the CBR’s policy of gradually moving towards inflation targeting and follows the recent increase in REPO limits.
Economy assessment remains broadly the same. The CBR highlights sustainable growth in demand despite the decelerating retail sales in April. At the same time, the authorities do not seem to be concerned about slow production growth. In a press release, the CBR urged that although core inflation continues to moderate and headline CPI remains at low levels, 2H12 inflation risks are significant, mainly due to tariff hikes, higher food prices, and global turbulence.
The CBR’s statement still includes the sentence, “the current level of money market interest rates is appropriate for the upcoming months”. In this regard, we see that the regulator will likely keep rates unchanged in July. The monetary authorities will be closely monitoring price growth in the coming weeks and months, and if CPI is above the regulator’s expectations, the CBR may remove the “upcoming months” part from the statement and, eventually, tighten monetary policy. We confirm our year-end CPI forecast of 7.0%, above the CBR’s target of 5.0-6.0%.
We believe the current decision will have a broadly neutral impact on the FX market (although it will cheapen short RUB positions), while the short end of the curve might move lower, as the decision limits upward volatility in O/N rates.