The regulator threatened to increase policy rates further if any of a broad set of potential risks materialise and consequently put at risk its medium-term inflation target (4.5% in 2015). While we believe that this decision has likely marked the end of the tightening cycle, the uncertainty regarding the timing of a turnaround in the policy cycle remains elevated, with risks tilted toward a later, rather than earlier, start to the easing cycle. We have therefore shifted our rate expectations, and now anticipate only 50bp of rate cuts in 4Q14.
What next? Reading between the lines, it seems that leaving rates unchanged was a difficult decision, as their previous language linked the adequacy of the policy rates to the (now missing) assurance that inflation was likely to moderate to 6.0% by the end of the year. So, while leaving rates on-hold, the CBR furnished the statement with as much hawkish wording as possible, explicitly threatening to increase the key rate if ‘existing inflation risks materialise, and threats to medium-term inflation targets emerge’. It sounds like the CBR is particularly concerned with the rouble outlook and consequent spillover into inflation, which we believe means that the central bank will execute extreme caution on the timing of any potential policy turnaround, which it implicitly links to sustained stabilisation on the FX market. The CBR’s inflation assessment also looks way more cautious than ours. We are therefore shifting our rate expectations further into 2015 and now expect only 50bp in rate cuts in 4Q14. Our latest Thoughts of an Economist contains a broader discussion on the monetary policy outlook.