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CBR monetary policy decision preview

The CBR is due to hold a Board of Directors meeting today and decide on key policy interest rates. Currently, the refinancing rate is 8.00%, the 1-d REPO fixed rate is 6.25%, 1-d REPO auction rate is 5.25% and ON deposit rate is 4.00%. The last time these rates were changed was December 2011.

Despite our expectations for higher base rates already in September, we expect the CBR to keep all rates unchanged but to be ready to act later this year.

This is likely to be a hard decision, because the inflation picture and outlook are really unclear. On the one hand, economic growth is cooling and the outlook for the next quarters is negative, while lending is decelerating, all of which points to inflation pressures abating in the future. On the other hand, inflation has already gone beyond the 2012 forecast (6.1% YoY in August and 6.3% YoY in 1-10 September vs. 6.0% YoY), core inflation is ready to exceed the forecasted level and both are well above next year’s target. In addition, there is double-digit wage growth and historically low unemployment.

Despite this, we believe that the CBR will keep rates unchanged in September, using the following arguments for its ‘no hike’ decision.

The increase in the CPI is partly attributed to the rise in food prices due to supply shock.

‘Silent’ monetary policy tightening is already happening by increasing the average cost of funds provided by regulators to the banking system.

The combination of tighter fiscal policy and recent RUB strength might be considered to be enough in the current environment.

The CBR could point to the fact that the CPI has exceeded year-end levels and say that the regulator will stay cautious, monitoring further inflation developments closely. We believe that in the current environment, a decline in oil prices and resulting RUB weakness might trigger an outright hike in rates. As our base case scenario still assumes Brent declining below USD 100/bbl this year, we continue to expect rate hikes in 4Q12. 

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

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