The ruble Market risks will keep the Central Bank from easing rates to 7%
The turbulence of the markets is likely to keep the Central Bank from lowering the rate to 7%, limiting the mitigation to 7.25% in About a week the consensus forecast of economists shifted downwards by 25-50 basis points, though not many expected softening. Expectations have affected the speech of the head of monetary policy Department, Igor Dmitriev in which he spoke of the desirability of a rate cut, as well as weak industrial production data.
In addition, the CBR is likely this week drew attention to the actions and the tone of the comments from other Central Bank. Fed rate hike on Wednesday, and improved assessment of the U.S. economy – a signal of confidence that we can continue the course of policy normalization. In the case of Russia, the normalization of policy is to reduce the rate.
World consumption of oil and business activity in the U.S., China and Europe talking about the impressive growth rate, although noticeable they some slowdown.
Brazil is largely in a similar situation reduced the rate by 25 basis points, as also is experiencing a period of record low inflation, while economic growth is much stronger there. The difference in GDP growth rates, and sluggish growth of industrial production and the relatively weak growth of retail activity are arguments in favor of more active measures of monetary policy.
Also pay attention to the weakness of the corporate sector. The strengthening of the ruble in the past year have hurt the competitiveness of our exports, increasing domestic spending. Complicating the situation is the mounting tensions in the financial markets. If the Bank of Russia will look not only at current and past data, and try to assess the prospects, the easing is mixed.
Fears of a trade war unleashed key markets. Us S&P500 fell yesterday by 2.5%. Japanese Nikkei fell in the morning to 3.5%, MSCI Asia-Pacific excluding Japan is losing 2.1%. The negative market reaction at the moment is not affected by oil, and therefore does not look a direct threat. However, the decline in the markets often have a negative impact on the interest in emerging markets.High interest rate in this case may stem the outflow of investors interested in higher yields.
On balance, we have a situation where the Central Bank could cut rates by 25bps.p. and assessment of market risk before further easing. However, it is also impossible to exclude and more decisive action to reduce rates immediately by 50 basis points if the Bank of Russia will focus mainly on the current assessment of the situation from the side of macroeconomics.