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CBR leaves base rates unchanged

At its monthly monetary policy meeting last Friday, the CBR kept the interest rate band unchanged. The refinancing rate stays at 8.25%, the 1-day REPO fixed rate at 6.50%, the 1-day REPO auction rate at 5.50% and the overnight deposit rate remains at 4.25%. The next policy meeting is scheduled for the first ten days of next month.

The CBR has materially changed its stance on inflation, taking the phrase ‘growing inflation expectations’ out of the press release. We think that this material shift in the wording implies that there is no unified opinion within the CBR on the inflation outlook. Besides, the upwardly revised forecast of CPI for the coming years brought more flexibility to the CBR in commenting on medium-term inflation risks.

Although the CBR mentioned that economic indicators pointed to the economy ‘cooling’ in August, the regulator again said that the economy was performing near its potential and highlighted the still tight labour market, robust lending activity, and the strong performance of agents’ confidence indicators in recent months.

We consider the CBR’s decision as neutral for the RUB and slightly positive for rates and bonds.

We still see further monetary policy tightening later this year, with a 25bp hike in all key rates. The main reason for this is the accelerating headline CPI and core inflation and, consequently greater risks for the CBR’s forecast for headline CPI next year (5-6% YoY). Besides, the fact that this time the CBR did not include the phrase ‘appropriate interest rate level’ and stated that monetary policy tightening would not pose significant risks for growth in the real economy, is supportive for staying in a hawkish stance over the coming months. However, the potential tightening cycle will not be long and, in our view, any further decline in economic activity would persuade the CBR to start the easing cycle as soon as 2Q13. 

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

CBR, inflation, CPI, ruble

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