Expert: Russia’s Central Bank will cut interest rate by 25 basis points

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We hope that following the meeting of the Board of Directors of the Central Bank of the Russian Federation, scheduled for 23 March, the key rate by 25 b. . to the level of 7.25%. Our assumption coincides with the result of the consensus of a Bloomberg survey (91%), however, recall that not in all cases, the actual decision of the regulator coincides with the expectations of most market participants.
The main fundamental prerequisite for the continuation of the easing cycle of monetary policy remains generally reduced and stabilized at historic lows, inflation – based on weekly values near the level of +2.2% in annual terms (which is below the target CBR -1,8%). Note also a fairly pronounced slowing in inflation expectations, which declined in February to 8.4 percent. The main reasons for the slowing of the CPI, as before, can be called the accumulated revaluation of the ruble (tens of percent compared with the highs of 2016) and quite a weak recovery in consumer demand.
Pay attention to the phenomenon that the growth of retail turnover relatively long time not been accompanied by an increase in real disposable incomes (strictly speaking, the actual dynamics is negative). It is possible to remember and about the effect of the high yield and the seasonal cheapening of fruits and vegetables – in August-September last year, last year was basically recorded General deflation, but now this factor loses relevance.
It is also noteworthy that in the official comments to the previous meeting of the Board of Directors of the RF Central Bank contained a reference to the disinflationary effect of the factors is continuous, moreover, the regulator contribution of these factors is estimated as more significant, compared to the previous period. In the end, the Central Bank of the Russian Federation admits the transition from moderately stiff to neutral DCT in the current year, given the assumption that inflation will be below the target CBR (i.e. 4.0 per cent). Taking into account the previously indicated target range for real interest rates in the 2-3% it is logical to assume that ceteris paribus (and the assumption of acceleration in CPI to 3.5%) the level of the key rate by year-end will be no higher than 6.5 per cent.
However, the local situation when making decisions in the field DCT is no less important, as repeatedly mentioned in the Central Bank of the Russian Federation. Currently it is not favorable in the context of the deterioration of Russia’s relations with the West (primarily Britain) and the presence of signs of some cooling of interest of foreign investors in Russian financial assets (however, this applies to other EM).
Significant uncertainty can be called trade restrictions recently imposed by the US, and the possible symmetric measures on the part of trading partners world’s largest economy. After all, the ultimate economic effect (it is possible that negative) from these steps at the present time to estimate quite difficult. Certainly important will be the outcome 20-21.03 FOMC meeting the fed, which will probably allow you to more accurately judge the pace of further tightening of DKP fed.
If the decision of the CD will coincide with the expectations effect for the market we evaluate both neutral as appropriate “step” is already largely reflected in market prices – primarily conditional long OFZs. The overall effect of decisions on economic processes in Russia will hardly be noticeable in the short term. On the one hand, economic agents have extensive experience of working in the conditions of a cycle of easing monetary conditions (reflected in the expectations), on the other, the deceleration of inflation and decline in the General level of interest rates cannot be called the sole conditions ensuring the growth of economic activity and the revival of the credit market in particular.
If the “step” at a rate to be more substantial (say, -0.5 percentage points), we can see that local purchases assets fixed income and a moderate increase in the pressure on the ruble in the context of a more aggressive narrowing of the interest rate differential (the U.S. dollar) and the decline of the ruble real interest rate (5.0%).
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Dmitry Harlampiev,
Director of Analytics
The Bank “Opening”