Russia: The key rate cut, but CBR plans may become muted

RUSSIA ECONOMICS - In Brief 27 Jul 2020 by Alexander Kudrin

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he Russian Central Bank cut the key policy rate by 25 bp to 4.25% and released its updated macroeconomic forecast along with some thoughts and interpretations of the ongoing developments. Generally, this updated forecast doesn’t differ much from GKEM Analytica's forecast published last week. However, a couple of issues, such as the balance of payments, may require a closer look at, as it is supposed to affect the exchange rate in 2H20 (the CBR had to keep silence on the latter).The CBR’s scenario assumes an average annual $38/bbl price of oil (Urals) in 2020. In 1H20 this price exceeded $40/bbl and in June-July hovered over $40/bbl. Therefore, $38/bbl as an average price is possible, but only if it stays at $35/bbl on average in August-December, which, in principle, cannot be ruled out.The CBR’s vision of the 2020 and 2021 balance of payments is shown in the table below. The second column (1H20) is the CBR’s estimate of the 1H20 balance of payments, published a couple of weeks ago. The fourth column (2H20) is simply a residual between the third and the second columns – CBR provided neither quarterly nor half-yearly accounts. The fifth column shows average monthly estimates of respective items as they should look in 2H20 to match the CBR annual outlook.Three months ago, the Central bank expected the current account to be negative in 2020 and 2021. This time, given the developments in recent months, the current account is expected to be positive in 2020 and 2021, albeit very low. In GKEM Analytica’s view, it doesn't look very much likely. Indeed, given the reported surplus in 1H20, the current account should turn strongly negative in 2H20. In some months it could happen,...