50 b.p. cut is expected tomorrow based on record low inflation

RUSSIA ENERGY / FINANCE - In Brief 14 Sep 2017 by Marcel Salikhov

We share a widely held consensus view that tomorrow 50 b.p. cut from CBR will follow. On July meeting CBR decided to stand still largely influenced by spike in inflation in June (+1.2% m-o-m after seasonal adjustment). But as the following inflation data showed, it was just temporary. In August headline CPI declined to 3.3% y-o-y% (-0.5% m-o-m) based on strong seasonal deflation in fruits & vegetables (-15.5% m-o-m; -0.8% y-o-y). Weather fluctuations haven’t caused that much damage to a new harvest as it was feared. Core CPI fell to 3.2% y-o-y to 3% in August. Weekly inflation data based on smaller basket of goods showed that deflation (-0.1% from September 1 - 11) continued in the current month.CPI by major group contribution, Jan 2013 - August 2017 Source: RosstatRecord low inflation coupled with higher oil prices and stronger RUB give incentive for CBR to cut more aggressively as current inflation is lower than 4% target. So 50 b.p. cut can be viewed as 25 b.p cut for September + 25 b.p. cut that didn’t happen in July. Mosprime 3m & RUB FRA 3x6 rates, 01/02/2017 - 14/09/2017 Source: BloombergBut such a move is already priced in and the bigger question is whether CBR will follow more aggressive attitude in the future. We think that another 50 b.p. cut till the year-end (October and December meetings) is to follow and maintain our year-end forecast for the key rate at 8%. We believe that it corresponds to current market consensus. But if inflation stays below 4% in coming months, more aggressive moves from CBR are likely.

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