Expect CBR to stay on hold tomorrow, but minor cut is possible

RUSSIA ENERGY / FINANCE - In Brief 28 Apr 2016 by Marcel Salikhov

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With inflation going down (+7.3% y-o-y in March; +7.3% y-o-y in April based on weekly data) and oil strong oil rally there’s a growing pressure on CBR to cut rates. For instance, Minister for Economic Development called again for an immediate cut. But as we have stated earlier, monetary policy has already de facto weakened due to increased fiscal deficit and extra liquidity through ‘budget channel’. CBR sets lower limits for refinancing operations in order to compensate budget liquidity inflows. But in a few months the banking system will probably switch to ‘structural surplus’ situation and deposit rate will become main policy rate. Due to lower demand credit and increased savings that are headed to deposits credit interest rates and deposit interest rates decline steadily even with stable key rate. In such a situation positive effect of lower rates on economy is rather small. So it makes sense for CBR to gain ‘inflation targeting’ credibility with little cost. That’s why we believe that CBR will decide to stay on hold tomorrow. While inflation declined from 15+% y-o-y rates as early as November there’s little room for further declines as ‘base effect’ is going away and unusual food disinflation will fade away. We’ve built inflation decomposition by ‘shocks’ based on our short-term monetary VAR model for Russian economy. Long term ‘natural’ level of inflation is estimated to be at 4.2% which corresponds to CBR’s 4% target. It’s the level to which inflation tends to gravitate without any shocks. All other factors are shocks that prevent inflation from getting to such rate. Based on these estimates current monetary policy stance still gives a positive contribution for i...