The Russian central bank has made quite an effort to dampen expectations of a rate cut at its next board meeting (July 29) after cutting its key rate by 50 basis points to 10.5% on June 10 after almost a full year of maintaining it at 11%.
Central bank governor Elvira Nabiullina gave an interview to business newspaper Vedomosti on June 29 and said that it is too early to talk about starting the rate cut cycle
. In its monthly publication, called "Talking Trends", the central bank's analytics department has come up with an exhaustive list of inflationary risks and reasons for monetary policy to remain tight.
Meanwhile, rumblings about a too-strong rouble (which is partially a result of high interest rates) have been met by a stern reminder that macroeconomic stability (i.e. low inflation) forms the foundation for resolving all other problems.
As if on cue (and luckily for the Russian central bank), the rouble has been weakening this week on the back of lower oil prices, removing some pressure on the central bank to cut rates.
In Talking Trends, the central bank listed a few reasons for keeping the rates on hold for now. Consumer price inflation has been stable at 0.4% monthly (or at 7.3-7.5% year-over-year) over the last three months, but food inflation has been accelerating.
The bank points to risks that food prices might continue to increase into autumn on the back of rising global prices and an unusually wet summer in the south of Russia.
The labour market remains relatively tight and as the economy recovers, nominal and real wages might start rising, putting pressure on prices and keeping inflation from falling to the target rate of 5-5.5% (y/y) by end-2016.
Monthly and annual Russian consumer price indices and FX rate, %:
Source: www.cbr.ru, www.rbc.ru
The central bank is still concerned about the budget situation and deficit financing, but less so now as the oil prices have risen closer to $50/barrel. The central bank increased its average Urals oil price forecast from $30/b to $38/b for 2016. The bank forecasts the Urals oil price to slide towards $40/b in H2 and remain there in 2017-2018.
Higher oil projections for 2016 mean that only about 0.5 trillion roubles of federal budget deficit (out of 3 trillion roubles) need to be financed by monetary means in H2'16, as the bulk of budget deficit has been monetised in H1 (around 1 trillion).
The remaining budget deficit would be covered by borrowing and privatisation proceeds (approximately 1 trillion) and other sources (such as savings rolled over from last year).
Among external risks, the bank believes that increased market volatility and the ongoing flight from risk might prevent central banks in emerging markets from softening monetary policies. On the other side, Russia's central bank does not seem too concerned at the moment about the amount of speculative money flowing into Russian markets, attracted by high interest rates.
In terms of analysts' consensus, the overall majority expects no change in interest rates before the parliamentary elections in Russia on September 18, according to a Bloomberg survey
. At the same time, there is an expectation that key rate would decline from 10.5% to 9-9.5% by the end of 2016 if the consumer price inflation hits the central bank's target of 5-5.5% by year end.
This means that the central bank of Russia might be on pause on July 29, but then it is expected to make cuts at every single out of the three remaining meetings in 2016. That is 50 basis points (0.5%) on September 16, then on October 28 and December 16. And while there might be no cut at the coming meeting, the bank statement, issued after each board meeting, could make it clear that rate cuts are on the way.