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CBR leaves rates unchanged

At its monthly monetary policy meeting last Friday, the CBR kept the interest rate band unchanged, in line with our and consensus expectations. The refinancing rate stays at 8.00%, 1d REPO fixed rate at 6.25%, 1d REPO auction rate at 5.25% and ON deposit rate at 4.00%. The next policy meeting is scheduled for the beginning of August.

The CBR’s decision was broadly in line with our view and consensus. The tone of the statement was for the most part neutral. Interestingly, the regulator replaced ‘the coming months’ with ‘in the near term’ in its sentence that “the current level of money market interest rates is appropriate for the coming months”, gaining flexibility and opening the way for possible rate hikes. This was not expected by the market (consensus was for no rate change this year), so we view the decision as more hawkish than the previous one.

The CBR also mentioned tariff hikes and food prices as a reason for the acceleration in inflation, highlighting that core inflation gained only marginally and indicating uncertainty over the behaviour of the food component in the coming months. It said that the economic performance in May was robust with a boost in retail sales, tight labour market and strong retail lending growth coupled with May’s recovery in IP growth.

We see the CBR closely following CPI in July-August (it has no clarity on food prices, the second–round effect of tariff hikes or the pass-through effect from a weaker RUB) and once it exceeds 6.0% YoY the chances of an interest rate hike are likely to grow substantially (our base case scenario envisages a new round of tightening in 2H12, with 50bp hikes in all key policy interest rates).

We see the decision having a broadly neutral impact on the FX market as the latter is to continue to depend on oil prices and the CA. However, the short end of the curve might drift higher leading to some curve flattening, as the market gradually starts pricing in a higher chance of rate hikes in the autumn. 

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

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