Article / 09 June 2016 at 10:00 GMT

A fully priced-in rate cut is on the cards in Russia

Russia oil and gas expert
United Kingdom
  • Higher oil and lower inflation allow room for cut
  • The need to keep rates high to attract capital not so pressing any more
  • Overseas analysts expect a 0.5% rate increase on June 10
  • Domestic analysts expect central bank to hold its fire
 Russia's central bank has room for manoeuvre, overseas analysts agree. Photo: iStock

By Nadia Kazakova

After almost a year of keeping the Russian key rates at 11% it seems to be the time for a cut and the central bank might have run out of excuses not to do so. 

The main concern has always been the low level and the volatility of the oil price. The oil price risks might have subsided, at least superficially, until the next big scare (either way). But for now, the $50-plus per barrel oil price has reduced the pressure on the rouble and subdued the volatility it has been suffering.

Needless to say, higher oil means a lower budget deficit (all else being equal), again reducing the need to print roubles, which makes the Russian currency weaker. 

An unexpected boon is a much lower probability of a rate hike in the US. This should prompt some reversal of capital back to emerging markets, including Russia. Again, good for the rouble and government bond yields. It should also make it less necessary to keep the Russian rates high to attract foreign capital.

The looming EU referendum in the UK on June 23 (and related risks) might be a consideration for the Russian central bank, but it is unlikely to be a swing factor. The direct impact on Russia of whatever decision British voters make should be very limited. 

There is also a matter of market consensus. The majority of analysts expect the central bank to cut the key rates by 50 basis points (0.5%) to 10.5% on June 10. 

Table. Consensus forecasts for key rate decision on June 10, 2016
x  Source: 

Geographically, opinion on whether or not the bank will move is divided. Forecasters at domestic financial institutions mostly expect no action from the central bank, the majority of analysts at the foreign banks see a 50 basis point cut. It seems that from outside prospective, a rate cut makes a bit more sense.

The central bank might still have concerns over inflation, which remained at 7.3% y/y in May. On a monthly basis, consumer price index (CPI) was up 0.4% month-on-month both in April and May. 

Table. Russia consumer price index, % m/m and y/y

The good news for the central bank is that weekly inflation decelerated all the way to zero in the first week of June. The bad news is that prices have stabilised mostly for seasonal produce, fruit and veg. Last year, monthly inflation was only 0.2% m/m, before shooting up again in the second half of the year. 

Yet, it could be different this time around, provided the oil price remains above $50 a barrel. If the central bank believes in such a scenario there is no reason why it should not cut rates now. 

According to central bank's own assessment, implied interest rates suggest that the market expects key rates at 10.5% by end June, i.e. it expects a 50 basis points rate cut on June 10. Therefore a decision to cut rates on June 10 should have little effect either on the rouble or bonds.

A rate cut, however, should be welcomed by most of the Russian banks outside the top 30, which rely on central bank financing to keep themselves afloat. 

– Edited by Clare MacCarthy


Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector

Nadia Kazakova Nadia Kazakova
As per consensus, the central bank cuts the key rate by 0.5% to 10.5%.
Nadia Kazakova Nadia Kazakova
In the statement, the bank says that inflation has stabilised and reduced its forecast for inflation to 5-6% by end 2016 (previously 6.4%, I believe).

Also, the economy should start recover (on quarterly basis) not later than 2H16, with economic growth at 1.3% in 2017, assuming the Urals oil price at $40 per barrel in 2016-2018.
Nadia Kazakova Nadia Kazakova
However, at the end of the statement, the bank says that inflation risks remain relatively high
Nadia Kazakova Nadia Kazakova
It might indicate that there would not be necessarily a reduction in rates at the next meeting on July 29, it might depend on the situation with the oil/rouble
Nadia Kazakova Nadia Kazakova
On balance, still a cautious rate outlook and probably slightly positive for the rouble


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