The CBR is due to hold a Board of Directors meeting today and decide on key policy interest rates. Currently, the refinancing rate is 8.25%, the 1-d REPO fixed rate is 6.50%, 1-d REPO auction rate is 5.50% and o/n deposit rate is 4.25%. The last time these rates were changed was September 2012.
Amid declining inflation and slowing economic growth and lending, we expect the regulator to refrain from increasing base lending rates. Moreover, in recent months, a worsening liquidity situation has actually resulted in a significant tightening of monetary policy. We do not believe, therefore, that rate hikes are needed. We also note that macro-prudential measures designed to cool the retail lending expansion will kick in from 1Q13. Today, we expect the CBR to leave repo rates unchanged and increase deposit rates 25bp in order to narrow the interest rate corridor and improve credibility. To ease liquidity conditions, the regulator might also decrease the rate on the RUB leg of its FX swap operations. Thus, taking into account our expectation of improving liquidity conditions closer to the end of the year, this week’s CBR decision will likely mark the end of the current tightening cycle. The next policy step after the pause will, in our view, be a step toward monetary policy easing, which we expect in late 1Q13 or early 2Q13. We expect moderate downward pressure on rates up to 1Y, and that the impact on the RUB after the CBR decision is likely to be marginally negative or neutral in the short-term.