CBR hints further easing in 2019; 1Q GDP growth is confirmed at +0.5% y-o-y

RUSSIA ENERGY / FINANCE - In Brief 18 Jun 2019 by Marcel Salikhov

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After the widely expected 25 bp cut last week CBR directly hinted at another 1-2 cuts by year-end. So by 2Q20/3Q20 “normalization” of monetary policy is achievable (around 6.5% for the key rate). We think that another 25 bp cut is already possible at the next (July 26) meeting. Figure 1. Key money market and policy rates, 2017-2019Source: CBRIt means that there is further potential for fixed coupon OFZs to appreciate. The inflow of non-residents funds in OFZ continued to support the RUB. In May 2019 about 150 bln RUB of 376 bln RUB issued by MinFin was bought by foreigners. The share of non-residents in OFZs was 29.4% as of June 1, 2019. A rapid decrease in the policy rate is also favorable for local banks as it will increase their NIMs. Figure. Resident and non-resident flows into the OFZ market, January 2015 - May 2019Source: CBRThe CBR also decreased its forecast for GDP growth in 2019 from 1.2-1.7% to 1.0-1.5% based on available data. Rosstat confirmed today +0.5% GDP growth in 1Q19 as part of the second release. As we expected, a decline in trade (-3% y-o-y) and real estate operations (-3.5% y-o-y) were the primary factors for the slowdown in economic growth. Mining (+4.6% y-o-y) and the financial sector (+7.6% y-o-y) made significant positive contributions. IP data for May (+0.9% y-o-y) confirmed that the surprise spike in April (+4.6% y-o-y) was caused by one-time factors and was short lived. Seasonally adjusted, IP declined 0.8% m-o-m last month. So we expect the 2Q19 growth rate will stay below 1%. At the same time, weaker growth rates push CBR for faster monetary policy normalization.