Expect CBR to stay on hold tomorrow

RUSSIA ENERGY / FINANCE - In Brief 17 Mar 2016 by Marcel Salikhov
Current economic situation presents dilemma in terms of Russian monetary policy. Oil rallied in the last month and recovered its up-to-date 2016 losses. Oil rally supported RUB which trades at 70 RUB compared to 80+ a month ago. Another factor is that recent inflation surprised to the downside. February CPI is +8.1% y-o-y (+0.6% m-o-m) based on lower food inflation. March inflation may come at "7+"% range based on weekly data. These factors give support for lowering key rate on tomorrow's meeting. CPI and major group contribution, Jan 2013 - Feb 2016 But we think that the cut tomorrow is unlikely. The major reason is that effective monetary conditions have already improved. Interbank rate fluctuates below 11% (current key rate level). OFZ yield is below 10%. The liquidity situation is now more affected by the size of fiscal deficit and the way Minfin finances it rather than by CBR refinancing tools. Minfin almost fully finances deficit by spending Reserve Fund and not by attracting debt financing from the market. It’s an emission mechanism and potentially may have pro-inflationary effects. In general liquidity provided by deficit financing is cheaper for banks than conventional CBR tools. CBR since 2H15 ‘sterilizes’ deficit liquidity injection by decreasing amount of bank refinancing. Repo amount decreased from 2.9 trln RUB early last year to mere 800 bln RUB in mid-March. Total liabilities of the banking sector attracted from CBR from 12% of aggregate balance sheet as of 01.01.2015 to less than 6% in March. Debt of banks owed to CBR by instruments, January 2014 - March 2016 As there’s abundant liquidity on local money market it doesn’t make sense to lower policy rates...

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