The CBR, after raising rates 100bp yesterday, stressed its readiness to tighten policy further if inflation risks and RUB devaluation expectations increase. We had expected a heftier rate hike (150bp) and did not rule out a temporary widening of the rates corridor in attempt to infuse confidence and contain pressure on the currency. Following the decision, the CBR governor Elvira Nabiullina also communicated the CBR's readiness to address concerns related to de-anchored exchange rate expectations and the shortage of USD liquidity. Without referring to particular levels, Nabiullina stressed that the current exchange rate is significantly undervalued (up to 10-20% in the current oil price environment) and should strengthen next year both in the baseline (oil at USD 80/bbl) and alternative (USD 60/bbl) scenarios. In addition, the governor stressed specifically that BoP flows and CBR operations should ensure that there will be no issues with a FX liquidity shortage over the next three years. Pertaining to this, Nabiullina highlighted that the 1-year FX repo facility was fine-tuned to allow banks to use Eurobonds as collateral, and that the CBR is considering expanding the collateral base further to include non-tradable assets (FX loans to exporters).
Regarding trading expectations, we believe that yesterday’s CBR decision is positive for the OFZ market. At current levels, the spread of OFZs to the key rate looks historically reasonable, even if adjusting for potential further rate hikes. We expect some disinflation next year, so we favor the long end here. Yet, FX volatility might spoil risk sentiment. Meanwhile, we believe that the fair price for front end NDF rates would be near 12.5-13.0%, given the uncertainty about the potential limits on the CBR’s FX swap operations. Yet, we would favour some steepeners on the NDF/XCCY curve, rather than outright receiving NDFs. From the FX market perspective, we believe that the CBR’s comments regarding USD liquidity issues are marginally positive looking into 2015.