CBR surprisingly cut key rate to 15%

RUSSIA ENERGY / FINANCE - In Brief 30 Jan 2015 by Marcel Salikhov

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CBR surprised the markets today cutting key rate by 200 b.p., to 15%. Monetary authorities announced ‘stabilization in inflation and devaluation expectations’ as a reason for the cut. We believe that the decision is inconsistent with declared policy of inflation targeting regime. It’s an obvious confirmation that’s CBR’s independent status is compromised. CBR increased key rate from 10.5% to 17% on December, 16 when official FX rate was at 61 RUB/USD and inflation was expected to decrease to 10% by the end of 2014. Since then inflation was heading higher. December CPI came at 2.6% m-o-m (+11.4% y-o-y). January CPI based on weekly estimates will be 2.3-2.4% m-o-m (+13.3.-13.5% y-o-y). So there’s no stabilization in inflation to the date. In February inflation will likely exceed 15% y-o-y. That will mean negative real interest rates for RUB by the next CBR monetary meeting (March, 13) and loose monetary policy. We’ve argued that high key rate mainly is a tool of financial stability. It helped to contain panic in December by ‘binding’ deposit outflow to FX and goods markets. Strong today’s reaction on FX market shows that devaluation expectations are far from contained. So there’s a major contradiction between stated policy of CBR (which they tried to follow in 2014) and today’s action. Probably CBR will have to increase rates again if there’s strong pressure on RUB and another fall in oil prices. Increased uncertainty over monetary policy and RUB value will undermine positive effect in terms of credit growth from lower key rate. It's not obvious that lower key rate will be transmitted to credit rates. To sum up, the cut largely undermines CBR’s credibility that was alrea...