CBR policy: more rate cuts needed to offset quantitative tightening
There is no doubt that the impact of the lockdown on the Russian economy in April was strong, and the decision to gradually lift the imposed restrictions is quite understandable – even despite the rather high numbers of infections in Russia. In this regard it is worth reiterating that despite the very high number of registered cases, the death toll in Russia is relatively low so far – as of May 12, lethal cases (2,116 people) accounted for 4.6% of "closed" cases, which was an improvement relative to a week ago and is much better than in many other countries. A growing number of tests and early diagnostics are helping to contain the spread of the disease at an early stage, which could be a kind of basis for the idea to start lifting the lockdown measures. It looks as though the strategy of the Russian government is now shifting toward finding the right balance between the need to keep the economy rolling and the need to prevent a further spread of the disease and higher death toll.
Macroeconomic policy is also turning less hawkish, especially after the CBR cut its key rate by 50 bp at the end of April and hinted at more rate cuts to follow; another 100 bp cannot be ruled out this year. The shift in monetary policy is double-edged. On one hand, the CBR is easing by cutting the key rate, but on the other hand, there is an ongoing tightening of the quantitative side as liquidity is being absorbed by FX intervention. It appears that with regard to the liquidity situation a lower key rate is able to only partially offset the tightening on quantitative side, which generally causes a disinflationary environment.
- The ruble appreciation was orchestrated by the activity of the Minfin/CBR duo – selling FX and absorbing ruble liquidity from the system. Until March 11, the authorities purchased FX in line with the fiscal rule and injected around R700 bln into the system this way since the beginning of the year. On March 11, things turned around, and selling FX absorbed around R550 bln (as of May 8). In April, oil prices remained low, and therefore the appreciation of the ruble could not have taken place without FX intervention.
- The combined effect of such a policy shift is rather complex as the so-called “liquidity of the banking sector”, which was in huge surplus in the past few years as the CBR/Minfin duo accumulated international reserves and offered various instruments such as deposits and bonds as part of its liquidity management policy, is now shrinking.
- In the past few years, banks did not require any meaningful refinancing from the CBR, but the latter’s claims on banks started to rise from March, while banks’ claims on the CBR decreased.
- Going forward, the demand for refinancing is likely to grow quickly as both Minfin and the CBR will continue to absorb liquidity on the open market, while the pace of budgetary spending is still unclear given the extraordinary nature of the situation. We expect the government to issue OFZ actively in the coming months.
- The potential demand for OFZ from Russian commercial banks may start to temporarily decline in the coming weeks as the money market rate is likely to rise. This situation may remain in place until the end of June, when a 1-year REPO facility from CBR will be available to them.
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