When the CBR’s Board of Directors gathers on 15 June to set rates, it will find itself still in the middle of the easing cycle. With the real interest rate in excess of 5.0% and the headline CPI firmly on the disinflation track, there seem to be no arguments against a further normalisation of the monetary policy stance.
Meanwhile, the biggest development since the last MP meeting is of the CBR’s own making: the start of replenishing international reserves. Achieving both inflation targets consistent with the newly announced programme would require the BoD to tread on the safe side and likely slow the pace of policy normalisation to 50-100bp.
The CBR’s forward-looking approach means that, for the most part, it is unexpected developments between meetings that alter the otherwise gradual path of interest rate change. This time around there has been little that was unexpected in the data released since the end of April.
CPI prints remained close to 0.1% WoW, as they were at the start of April, while two monthly inflation reports show that deceleration is broad based.
Food prices remain the key component of disinflation, while non-food items are slowing in terms of consecutive growth (although they have yet to break the headline upward trend).
After a brief appreciation, USDRUB is again roughly at the levels seen at the start of April on the back of seasonal BoP weakness, with increased debt and dividends repayments and tourism-related demand for FX.
FX purchases are part of the easing package. While the data flow has been light, the most notable change was made by the CBR itself – the introduction of a mechanism to replenish foreign reserves. It remains to be seen whether the CBR has decided that some range for the RUB exchange rate (or much more likely REER) relative to its fundamental levels is acceptable, but the new structural demand for FX certainly affects the market equilibrium itself, pushing it lower. From a practical stand point, this effect is an easing of the monetary policy stance in itself, thus shaving points off the amount of easing through key rate cuts, if the CBR is to be consistent with the previously announced path of disinflation.
Conducting two experiments at once, the CBR might proceed with more caution. As a result, we amend our base case of a 100bp cut and expect that the CBR will slow down to a 50-100bp range. The current Bloomberg consensus assumes a 100bp cut, while the OFZ yield curve implies a cut twice as high, at 200bp, although the NDF curve implies a less ambitious 50bp cut. Major risks to the inflation target remain modest and primarily include factors affecting the FX market, including commodity price volatility and a sooner than expected increase in the Fed’s target rate.