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CBR – keeps rates on hold – reserve replenishment halted in baseline scenario

 
14.09.2015

This morning, we published CBR Monetary Policy Decision – Monetary & fiscal outlooks convergence. Excerpts from the front page are given below.

The Board of Directors meeting resulted in a ‘no change’ decision and the key rate left on hold at 11.0%. This is consistent with market expectations and our call. The guidance for October is neutral, as the CBR looks at whether new growth developments outweigh inflation surprises. We believe the CBR is likely to stay on hold for another decision making cycle, but the balance is shaky and might be tilted towards a cut if inflation run rates undershoot expectations.

The guidance is neutral… The CBR reiterated its readiness to revise the key rate depending on the balance between inflation and growth surprises in the next month and a half. The preference for upward and downward changes in the key rate is in our view asymmetric: the CBR might be more ready to allow for temporary real key rate compression (as inflation is driven by one-off supply side shocks) and keep the rate on hold, while there are certain triggers that would likely lead to a cut at the next meeting:

inflation printing in the range of 0.4-0.5% MoM in both September and October;

the decline in investment deepening to -10 or -11% YoY and real wages to -11 or -12% YoY in September;

unemployment picking up to above 6% SA in September.

… but the usual caveats remain. The CBR is to monitor deposit and survey data for signs of growth in depreciation and inflation expectations, and that might lead to a temporary reversal in the easing course. The inflation outlook for YE15 has been updated to 12-13% YoY (we forecast 12.5%).

Monetary and fiscal outlook convergence… The CBR baseline scenario for oil in the coming years is USD 50/bbl, in line with the assumptions for the 2016 budget announced by the government (but more conservative than the updated outlook from the Ministry for the Economy as reported in the media, no official numbers released yet). This is a welcome sign of enhanced coordination within the economic block of the government (see our Russian Economy Monthly – May; fiscal dominance in reverse, of 7 July).

…but the fiscal policy stance remains among the key risks for the medium-term inflation outlook. So, the CBR is likely to pay close attention to the budget draft (due to be submitted before 25 October), especially in terms of pensions, public employees’ wages and tariff indexation.

International reserve replenishment halted as the CBR’s baseline projections show no additional FX purchases if oil prices continue to stay below USD 60/bbl. Even in an upbeat scenario (oil gradually recovering to an average of 75 in 2018), reserve replenishment dwindles to USD 15bn per year, or USD 60mn a day (down from USD 200mn previously).

Petr Grishin, Alexander Isakov
VTB Capital analysts

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