Our comment

The Bank of Russia has decided to ease monetary conditions yet another time at its the last policy meeting before summer break. The watchdog made a 25-bps rate cut, to a record low of 4.25%, a fourth cut in a row this year.

Nearly all market participants expected that the cost of lending would be reduced once again, investors split almost equally on the projection (25 or 50 bps cut). The regulator’s adopted a tougher tone, though it is still dovish. The CBR has also revised its medium-term forecast. The CPI will stand at 3.74.2% (down from previously expected 3.84.8%) this year, while consumer prices are projected to advance 3.54% in 2021, according to the updated scenario. Therefore we leave our year-end key rate forecast unchanged at 3.75%. Given low inflationary pressure (August and September may even see seasonal deflation) and the regulator’s plan to keep rate in the positive zone, there’s still room for further monetary policy easing in the second half of 2020, and the downside potential is within 50 bps. However, the current short-term OFZ yield does not reflect this scenario, which should support the secondary market if the rouble remains stable and there are no external shocks.

Market reaction

In the run-up to the rate announcement, OFZ volatility has traditionally been weak, the prices consolidated near the current levels. Shortly after the announcement, no reaction followed neither from the rouble nor from the OFZ yields. However, the long-end segment of the sovereign curve was later subject to a moderate correction, as the prices dropped by 0.8 pt. The rouble also began to weaken slowly, driven by the news that the regulator decided not to carry out FX-buying that it had previously put on hold as part of the Sberbank deal.

The briefing highlights:

  • Inflation: Disinflationary trends still prevail, they are expected to significantly impact the economy going forward. Inflation return to a 4% target is not expected sooner than 2022. The annual inflation forecast for this year is adjusted to 3.7-4.2%. Currently, the annual inflation stands at 3.3%. CPI growth for the rest of the year will be largely explained by a low base effect in 2019 rather than the current price increase.
  • Economy: GDP projection for 2020 was not subject to significant adjustments as compared to the April forecast. The economy is expected to see a 4.55.5% contraction followed by 3.5-4.5% recovery in 2021, driven by both increased stimulus and policy easing.
  • Key rate outlook: The Central Bank still sees room for further key rate cuts. However, the cuts will be made based on the actual environment. Moreover, it is now important to assess the effectiveness of the steps made, which becomes clear only after a three to six months lag. On the cut size, the regulator is getting back to a 25-bps cut, since bolder steps are only needed in the state of emergency, while it is currently necessary to fine-tune the existing parameters.
  • Neutral rate: it was decided to narrow the neutral range from 23% to 12% going forward. Thus, the neutral rate, which is a rate that will be in place when the regulator decides to get back to neutral monetary policy (currently incentive measures are taken) will go down to 56%.
  • Currency interventions: based on the oil price in the medium-term forecast, FX-purchases under the budget rule will resume only in 2022. The Central bank plans to offset transactions for foreign currency purchases in the framework of the Sberbank deal (approximately ₽1.8 trln) and purchases postponed since 2018 and pre-emptive sales that were conducted in March-April. The balance of these transactions is ₱185 bln in rouble equivalent. This amount of foreign currency will be evenly sold in addition to regular fiscal rule-based operations over the course of the fourth quarter of 2020.
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