Brocker.Org: Russia: A 50bp cut by CBR is feasible as well – BofAML


Analysts at Bank of America Merrill Lynch explains that while they expect only a very modest 25bp rate cut today by CBR as a baseline, they think a more aggressive 50bp move is possible.

Key Quotes

“Apart from signs of resilient inflation, all other major indicators continue to improve, which could warrant a greater cut. Reasons for a more aggressive cut are possible signs of a renewed inflation slowdown next week and rather optimistic inflationary expectations, which have already reached the 4% target. On top of that, we also note the persistently weak macro, as well as a strong RUB, which both call for further easing.”

A cut alone is not enough to undermine the RUB

  • We think that the expected 25bp or even a more aggressive 50bp rate cut would not have much of a negative impact on the RUB by itself. Thus, the real policy rate in Russia remains one of the highest and will likely remain so due to the expected inflation slowdown. As a result, we keep our positive view on the RUB despite the easing cycle as the curve has already priced a large part (if not all) of the expected easing. However, the easing could start to impact the RUB, if the CBR further softened its rhetoric, potentially guiding for more aggressive rate cuts in excess of the 150-200bp that is already priced in over the next 12-18 months.
  • We think that such potential dovish guidance could come in the form of comments on the likely stabilization of inflation below the 4% target in the near future. We believe this could signal acceleration of the CBR’s easing cycle towards an equilibrium real policy rate of 2.5%. So far, we do not regard such a scenario as likely. However, the CBR’s rhetoric could change as soon as inflation finally reaches its ambitious 4% target.”