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Bank of Russia leaves base 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 was left 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 set for the first half of September.

The key points from the accompanying statement, which was slightly hawkish as the bank removed the «rates are appropriate» phrase, are as follows (our view in italics).

The CBR said current headline CPI (5.7% YoY) is still within its FY12 target of 5.0–6.0%. Neutral.

The regulator is comfortable with the recent increase in headline CPI, as it is driven by supply-side factors (tariffs, food), while core CPI increased just marginally from 5.2% to 5.3%. Neutral.

The CBR highlighted the heightened risks of an increase in inflation expectations on the back of the increase in food prices. Hawkish.

Phrase «rates are appropriate» was dropped from the statement pointing to the increased probability of a rate change at the next policy meeting. Hawkish.

But at the same time, the sentence «output is close to potential, thus demandside driven inflation risks are low» remained. Neutral.

For the first time the CBR said it is starting to see the results of higher money market rates passing into the real economy leading to the recent slow in lending activity, which the regulator expects to continue. Neutral to Dovish.

We maintain our forecast of a 25bp base rate hike in September, but there is a risk they might be left unchanged. Under our base case scenario, we still expect the CBR to hike rates 50bp in total this year in an attempt to preserve its credibility after missing its inflation target for this year and to keep inflation expectations anchored by managing the expectations of economic agents. In addition, the liquidity situation will be key in determining money market rates. The next policy meeting is set to take place in the first half of September.

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

CBR, CPI, inflation

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