CBR kept key rate unchanged

RUSSIA ENERGY / FINANCE - In Brief 20 Mar 2016 by Marcel Salikhov

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As we have expected, CBR’s Board of Directors decided to stay on hold keeping key rate at 11% despite recent increase in oil prices and lower inflation. CBR head E. Nabiullina stated in her statement after the decision exactly the same reasons we’ve noted. First, increased budget financing has led to more accommodative monetary conditions even with th same policy rates level. Second, there are doubts that recent oil rally is sustainable. So CBR uses $30/barrel in 2016 as baseline scenario. It’s expected that GDP will decline 1.3-1.5% in 2016. In accompanying press-release there is a statement that “to enable the accomplishment of inflation targets, the Bank of Russia may conduct its moderately tight monetary policy for a more prolonged time than previously planned”. We think that is an indication of new round of debate about whether current policy rates are appropriate. For example, before the Friday’s meeting Economic Development minister A. Ulyukaev publicly stated that there’s “significant space” for lower interest rates. So CBR tries to defend staying “on hold” even with lower inflation rate. Next meeting is scheduled for April, 29th. We think that it’s more likely that CBR will again decide not to change interest rates but the decision will be conditioned on oil prices and inflation dynamics. It’s also time to watch more closely budget situation as it’s becoming more important in term of influence on monetary policy.