Economic Analysis - Quick View: CBR Cut Meets Expectations, More To Come - 02 OCT 2017


The Latest: On September 15, the Central Bank of Russia (CBR) resumed its monetary easing cycle which began in late 2015. From a level of 9.00%, and in line with consensus expectations, the bank cut its key rate by 50 basis points (bps) to 8.50%. The cut was widely expected on the back of much lower inflation. Since the previous meeting on July 28, when it left its key rate unchanged, the consumer price index (CPI) reading slipped to 3.3% y-o-y, below expectations and the central bank's target of 4%.

Implications: The gradual return to lower interest rates will provide further stimulus to Russia's economic recovery. In Q217, the country's real GDP growth accelerated to 2.5% y-o-y, beating market expectations of 1.7%, and with this backdrop, the central bank announced that it had revised up its forecast for GDP growth in 2017 to 1.7-2.2%. Over the following weeks we will be looking at new economic data readings to potentially reassess our growth projections (we forecast 1.2% GDP growth in 2017). We also note that despite the key rate cut, the central bank's still moderately tight stance, and the surprise slowdown in inflation, have left Russia with some of the highest real rates globally, which will continue to provide support to the rouble in the near term.

What Next: The CBR noted that further cuts to the key rate are possible over the next two quarters. We expect two more 25bps cuts by end-2017, which will bring the key rate down to 8.00%. This reflects our core view that the path towards the central bank's nominal equilibrium rate of 6.5-7.0% will be marked by caution, as medium-term risks of inflation overshooting the target remain elevated, stemming from volatility in global commodities and financial markets, weak productivity growth and sticky domestic inflation expectations.

More Cuts To Come
Russia - CBR Key Rate, %, Consumer Price Index & Consumer Inflation Expectations for the Next 12 Months, % chg y-o-y
Source: CBR, Bloomberg, BMI

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