Russia's CBR makes third rate cut in 2019 to pre-Crimea 7%

Russia's CBR makes third rate cut in 2019 to pre-Crimea 7%
Russia's central bank cuts rates by 25bp to 7% on the back of faster than expected falling inflation
By bne IntelliNews September 6, 2019

The board of the Central Bank of Russia (CBR) cut the key interest rate by 25bp to 7% at the policy meeting on September 6, in line with wide consensus expectations cutting the key rate for the third consecutive time this year.

Notably, the last time the key interest rate was at 7% was in March 2014 just before the Crimea crisis broke, after which the rate was ramped up by 8pp by December 2014 in an emergency hike due due to the extreme ruble volatility that followed the collapse of the oil prices.

The CBR attributed the rate cut, as before, to slowing inflation and underperforming economic growth, and noted that further cuts could be considered at one of the coming meetings. 

Inflation has been falling faster than expected this year and in August declined by 0.2% month-on-month and eased to 4.3% in year-on-year terms, according to the latest data by Rosstat statistics agency.

"Given the current inflation dynamics, we have downgraded our year-end inflation forecast to 3.8% y/y, below the CBR's forecast of 4.2-4.7%," Sberbank CIB commented on September 6.

The Ministry of Economic Development also expects inflation at 3.6-3.8% at the end of 2019, already below the CBR target of 4%.
Analysts surveyed by Vedomosti  believe that the CBR will continue switching to moderately loose monetary policy and cut the rate, although it will probably pause during the next meeting. As the same time the regulator previously showed no hesitation in increasing the rate considerably in unfavourable external conditions.

Last year the CBR briefly hiked rates, raising them twice in September and December, despite a fall to a record post-Soviet low of 2.3% last summer, in anticipation of new US harsh sanctions and a VAT hike of 2pp that came into effect in January. However, the sanctions never appeared and the economy absorbed the VAT hike more easily than expected. At the time bne IntelliNews argued that the show down with the US had induced a “war mentality” in the CBR, but this week’s cut represents a return to “peacetime” economic management.

Previously Sberbank analysts argued that the CBR sees the inflation-neutral key rate in 2020, suggesting that the neutral key rate is below 7.00% and arguing that the regulator might opt for a pause after reaching the threshold.

The CBR managed to bring down inflation from double-digit readings to a post-Soviet low of 2.3%-5% between the summer and the end of 2018. The inflation-targeting regulator was generally inclined towards moderately loose monetary policy, but it had been thrown back by a worsening in sanctions and the external environment in April 2018. 

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