Bank Of Russia To Keep The Key Rate On Hold… For Now

We expect the Bank of Russia (CBR) to keep the key rate at 7.75% on 8 February, mainly thanks to the CPI trend staying within the forecast range, yet uncertainties regarding further steps should put the CBR commentary in focus.

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We expect the CBR to keep the key rate at 7.75% at the upcoming meeting

We see several reasons why the Russian Central Bank should keep the key rate on hold on 8 February:

  1. Acceleration of CPI to 5.0% YoY as of January comes in at the lower range of expectations and reflects the effect of the VAT hike effective 1 January 2019, probably softened by the weakening in the consumption trend. The CPI figure is thus far well below the 6% threshold the CBR had outlined for 1H19 when incorporating the tax hike effects in its macro assumptions. Based on the flash weekly data, inflation may have stabilized in the first half-week of February.
  2. Although the 2.3% GDP growth in 4Q18 exceeded market expectations of the 1.5-2.0% potential growth rate estimated by the CBR, this positive result should be seen as a one-off. As we mentioned earlier, the growth is not broad-based, seems localized in the oil&gas sector, and still implies a slowdown in consumption from 3.0% in 2017 to 1.9% in 2018 and investments from 5.5% to 2.3%.
  3. Since the previous CBR meeting the market mood improved globally, as the softening in Fed rhetoric has resulted in appreciation of the ruble and its peers by 3-6% to USD, yields on local state bonds retreated by around 50 basis points, and the majority of EM central banks have kept their rates on hold.
  4. In the near term, the balance of payments does not seem to require additional protection through higher rates, as the 1Q19 current account of US$9-10 billion per month is large enough to cover:
  • FX interventions, which even with the announced catch up on the 2018 backlog, are staying within US$4 billion per month in January and February;
  • foreign debt redemptions, which we expect to stay within US$1 billion per month in 1Q19 (vs. scheduled gross redemption of US$3-4 billion per month); and
  • net portfolio outflows from state bonds, which were as little as US$0.1 billion in November and December 2018 and may have stopped completely in 1Q19.
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