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CBR Monetary Policy Decision – Change in tone yet easing cycle to go on


Yesterday we released CBR Monetary Policy Decision – Change in tone yet easing cycle to go on. Excerpts from the front page can be found below.

The CBR has delivered a 100bp cut, phasing out emergency tightening and bringing the key rate to 11.5%. The real interest rate decreased to 4.5%, according to both our and the CBR’s inflation projections. The decision came in line with our projections and the Bloomberg consensus. In its press release, the CBR emphasised real wage contraction and the adjustment to import restrictions as the key components of disinflation, and looked forward to a further decline in inflation expectations. The easing cycle is likely to continue at the next meeting (31 July), yet the pace could slow further.

Disinflation and demand weakness to dominate the outlook. The CBR reiterated its view that the slowdown in economic activity is only partially structural, as signs of cyclical demand weakness are abundant, including declining machinery and labour utilisation, and real wages (-13.2% YoY in April) and the rising unemployment rate, on our estimates to 6.0% SA in May. The CBR’s medium term outlook is conditional on the terms of trade, with oil at USD 60/bbl bringing a 0.7% YoY output contraction in 2016, while oil at USD 70/bbl implies a 1.2% YoY recovery (zero growth at 63.5-64.0).

Easing to continue, but likely to slow down. The most visible wording change is the statement that “the potential of monetary policy easing will be limited by inflation risks.” We interpret this as indicating that the pace of cuts is likely to decelerate to 50bp at the next MPC meeting (unless there are downside inflation surprises). On our estimates, the CBR’s expectations are set to a drop of the headline CPI to 14.5-14.7% YoY by 31 July. Values below this threshold indicate disinflation outpacing projections and increasing the likelihood of another 100bp cut; values in or above the range are suggestive of a 50bp cut. The real interest rate is unlikely to break below 4.0% in 4Q15.

Mute on reserve replenishment. The press release avoids any references to the CBR’s FX outright operations launched back in May. This is in line with CBR speakers’ narrative that FX purchases on the open market are neutral for the FX market equilibrium and affect neither the inflation trajectory nor the monetary policy stance. In our view, this means that the CBR might take a more paced approach to reserve accumulation or even phase out operations later in the year, as BoP pressure on FX is to intensify.

Disinflation is a shared responsibility. While the CBR notes a range of external risks to the inflation forecast, the press release underscores the key internal risks, including an easing of the fiscal stance and higher than expected indexation of tariffs in the coming years, as well as the size of the second round effects due to the utilities indexation in July.

We maintain our expectation for the key policy rate to be reduced to 10.0% by YE15 and 8.5% by mid-2016, but see risks of a faster policy easing. Four MPC meetings remain this year, with the next due to take place on 31 July.

Alexander Isakov, Petr Grishin
VTB Capital analysts


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