Bank Of Russia Cuts Rates By 100bp, Guides For More Cuts

The Bank of Russia aggressively cut the key rate from 5.50% to 4.50% today, and the guidance suggests that there is more to come. Our initial take is that another 50 basis point cut is highly likely this year, and if CPI continues to underperform the 4.0% target, the key rate may fall to 3.5-4.0% in 4Q20 or 2021.

Central Bank of Russia, Moscow

CBR makes an aggressive cut and maintains dovish guidance

The Bank of Russia cut the key rate from 5.50% to 4.50%. This move is in line with the consensus forecast, though we were leaning towards the conservative side of the 50-100 range, thinking that the CBR would prefer to make smaller cuts while maintaining significant room for further reductions.

The key rate guidance is slightly less aggressive than before, noting that the Bank of Russia "will consider the necessity of further key rate reduction at its upcoming meetings" after previously saying it "holds open the prospect of further key rate reduction at its upcoming meetings".

Nevertheless, the content of the communique is still dovish, as the CBR mentions that:

• short-term pro-inflationary pressure related to market volatility and panic stockpiling is over
• CPI, currently at 3.1% YoY, will move higher due to base effects, but will be pressured by weak demand and the recent ruble appreciation; the GDP drop in 2Q20 may be deeper than initially expected (though annual GDP guidance is unchanged at -4-6%). Importantly, the CBR dropped the previous 3.8-4.8% YoY CPI expectation mentioned at the time of the previous decision
• there are significant risks of CPI underperforming the 4.0% target in 2021 due to the above-mentioned disinflationary factors.

The decision and the overall tone of the CBR communication suggest that room for a further cut in the key rate remains, supported by a weak economic performance, below target CPI, and the example of Russia's emerging market peers. The terminal rate floor is now lower than the initially believed 4.0-4.5%. However, given the CBR's aversion to negative interest rates (fearing capital outflow, as we discussed earlier), it's not much lower, at 3.5-4.0%, depending on the actual performance of the CPI. For now, we assume 3.7% YoY CPI growth in 2021, although this forecast is highly uncertain given the still-volatile external markets, as well as the local economic performance and fiscal response. The announced fiscal stimulus so far has been modest, at 3.5% GDP, but it may have to be increased if household income, consumption (data for April-May to be released later today), and approval ratings remain under pressure. 

Lowering key rate outlook for 2020-21

While previously we saw the key rate floor at 4.0-4.5% for 2020-21, this view is too conservative. A further cut of 50bp cut from the current 4.5% level now seems to be the base case for 2020, but additional cuts are also possible for 4Q20 and 2021 if CPI shows signs of sustained underperformance to the targeted 4.0%.

The bond market seems to be taking the outcome of the CBR decision positively but will be looking forward to hearing any updates on the CBR's view about the long-term equilibrium rate and on the negative real rate, in the event that they become a reality for all of Russia's EM peers.