CBR likely to cut by 25bps – TD Securities

Izidor Flajsman, emerging markets strategist at TD Securities, suggests that the Central Bank of Russia (CBR) will cut by 25bps on Friday, with global risks and easing inflation taking precedent.

Key Quotes

“Since the July board meeting, inflation developments have been positive. CPI inflation fell to 4.6% y/y in July, down from a prior 4.7% y/y previously and core CPI also fell to 4.5% y/y from a prior 4.6% y/y. Moreover, the global financial environment remains decisively dovish, with many other EM countries cutting policy rates recently amid deteriorating growth prospects. The biggest argument against easing since the July meeting is that USDRUB has moved over 5% higher, which could add to 'pro-inflationary' risks.”

“On balance, we still think that CBR will cut by 25bps on Friday, with global risks and easing inflation taking precedent. We’ve held this view since 14 June and the FRAs are now pricing in this scenario. Indeed CBR Chair Nabiullina signalled that two more rate cuts are possible this year while Alex Zaboltkin, who heads the monetary policy department, stated that 25bps point cuts will remain the preferred option unless there is a big positive data surprise.”

“After Friday’s easing we expect one more policy cut this year at the December meeting, and one more next year, in March, bringing Key Rate down to 6.5%. Given that the inflation rate is likely to be at around 4% by then, this would put the real rate in the middle of the 2-3% range, which CBR deems to be neutral.”