CBR expectedly cut the key rate by 25 b.p. to 7.25%

RUSSIA ENERGY / FINANCE - In Brief 26 Jul 2019 by Marcel Salikhov

At today's meeting, CBR cut the rate by 25 b.p., as it was expected. Inflation is slowing and CBR expects to reach 4% target in early 2020. Main factors attributing to the rapid decline in inflation are weak consumer demand, strengthening of the RUB, lower prices for fruits and vegetables. At the same inflation expectations of the households remain elevated. In accompanying press-release, the Board noted two key risks that could increase inflation by the year-end. Firstly, it's traditional surge growth in budget expenditures. Secondly, it's an undecided decision about how to use the National Wealth Fund when it reaches a threshold of 7% GDP. Current economic growth in Russia is below expectations of the monetary authorities due to low investment activity and weak external demand. Acceleration of industrial production in 2Q19 is viewed as temporary. From 2H19 an increase in public investment is expected. So uncertainty about future changes in fiscal policy looks like the main cause of concern for the central bank. So the focus on on fiscal policy from CBR will inrecase in future meetings. Current inflation continues to look weak. According to weekly estimates, July inflation will be around +0.3% m-o-m and +4.7% y-o-y. We expect annual inflation to stay above 4.5% by October 2019 and to decline to 4% by year-end. So we expect that there will be another 25 bp cut on September meeting and one or two more cuts of the same size in 4Q19.Chart. Major policy and market rates, January 2018 - July 26, 2019Source: CBR

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