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«The probability of decline is slightly higher now» – Cbonds Consensus Forecast

June 15, 2018 | Cbonds

Today, on June 15, this year's fourth meeting of the Bank of Russia on monetary policy will be held, on which a decision will be made concerning the size of the key rate. Since March 23, after a decrease of 25 basis points, the key rate is at the level of 7.25% per annum. The market does not consider the economic situation in Russia favorable for any changes. Analysts agreed that the regulator would prefer to keep the rate at the same level. However, positive sentiments are also present on the market. 

"By the beginning of June, inflation growth rates in annual terms remained unchanged at 2.4% since the last meeting of the regulator in late April," comments Yury Kravchenko, Head of the Department for Analysis of Banks and Money Market Veles-Capital. "Nevertheless, in recent years, there have been clear signs of an increase in inflationary pressures. Thus, since the last meeting of the Central Bank on April 27, the ruble lost nearly 9% of its value (the decision was made by the Central Bank at the level of the dollar equal to 57-58 rubles at the end of April). Inflationary expectations of the population, according to the Central Bank, rose in May from 7.8% to 8.6%, and the rise in prices for gasoline remains quite noticeable. After the next increase in the rate of the Federal Reserve System and signals in favor of two more rate increases until the end of 2018, the neutral level of rates in the domestic market can already be reached at a value of 7% per annum at a key rate. That, in fact, implies only one rate reduction by 25 basis points until the end of the year. In such conditions, we expect that the Central Bank will keep the key rate at 7.25% per annum on June 15. 

"The CBR has an opportunity to deliver a "hawkish" 25bp cut at its 15 June policy meeting," considers Vladimir Osakovskiy, the Chief Analyst of Bank of America Merrill Lynch. "Inflation is showing no signs of acceleration due to the recent RUB weakness, while the CBR’s "hold" in April might already have been a response to the latest spike in inflationary expectations. The uncertainty over fiscal policy moves from next year remains the key medium-term inflationary risk. However, the risk has actually declined since the last meeting with the unchanged Cabinet, reiterated fiscal rule and the likely limited net changes to fiscal policy. Meanwhile, the economy is showing fresh signs of weakness despite strong oil prices, which might justify renewed policy support.  

We change our baseline call for a CBR decision on 15 June from another "hold" to a cautious 25bp rate cut. With both inflation and the economy weak, the likelihood of a cut are now slightly higher than for another "hold", in our view. However, the room for further rate cuts is getting narrower, so we keep our medium-term outlook for monetary easing over the next 12M at a cumulative 75bp, including the expected move in June". 

Mikhail Poddubsky, the Leading Analyst at Promsvyazbank, does not rule out the possibility of both rate fixity and reduction: "We consider the scenario of the rate reduction by 25 basis points and keeping rates unchanged at the upcoming meeting of the Bank of Russia almost equally probable. On the one hand, the growth of inflation expectations and the increase in prices for gasoline may prompt the regulator to maintain rates. On the other hand, the gradual normalization of the situation on the market after the April volatility growth may contribute to the long-awaited achievement of the level of the 'neutral' rate." 

Irina Lebedeva, the Senior Analyst on the debt market of Uralsib Capital, is waiting for the rate to remain at this meeting: "At the end of the year, my forecast is 6.75%, i. е. 2 declines of 25 basis points until the end of the year." 

Natalia Orlova, the Chief Economist of Alfa-Bank, also expects that the rate will remain unchanged: "At the time being, in the setting of the recent increase in gasoline prices and the possible acceleration of price increases against the background of the World Cup, the rate reduction does not seem necessary. Nevertheless, until the end of the year, the Central Bank must reduce the rate at least once more in order to bring it to the range of fundamentally reasonable value of 6-7% in nominal terms in accordance with previously announced plans to reach this level in 2018; therefore, in fact, we can say that the regulator is waiting for the right moment, in order to justify such a decision." 

Vladimir Tikhomirov, the Chief Economist at BCS Global Markets, reported his stance on this issue and joined the number of analysts who are confident in the cautious actions of the regulator at the upcoming meeting. 

Mikhail Krylov, Director of Analytical Department of the Investment Company "Golden Hills - Capital AM": "The Central Bank may quite leave the rate at the level of 7.25%, because there are alarming signs that the dollar/ruble pair in case of further softening of monetary policy may reach the position of approximately 70. We would like to see our economy strong enough to further reduce the rate." 

Elena Vasilyeva-Korzyuk, Head of the Analytical Department of AK BARS Finance: "We believe that the Bank of Russia will refrain from reducing the key rate at the meeting on June 15th, as the dynamics of the exchange rate and gasoline prices imply an increase in inflation in the forthcoming months, as well as there is no clarity on the revision of budget expenditures, taking into account the costs of implementing the May decrees. The weakening of the ruble was reflected in the growth of prices and the process so far, in our opinion, is not over. Inflation in April was 2.4% y/y. At the same time, as adjusted for seasonality, the monthly price increase accelerated to a level slightly higher than the inflation rate of 4% per annum. 

A pause in the rate reduction could last until September. According to the results of this year, we expect the CBR to reduce the key rate to 6.75-7% per annum." 

Valeriy Vaysberg, Director of the Analytical Department of the Investment Company REGION: "I expect that the Bank of Russia will keep the key rate at the level of 7.25%, citing, among other things, changes in the budget policy in connection with the need to implement the decree on the development goals of Russia until 2024. At the same time, the regulator will leave in the final release a phrase about the return to the neutral monetary policy until the end of 2018." 

"We believe that the Central Bank will keep the key rate at 7.25%," said Dmitry Dolgin, Senior Sacro Strategist at Gazprombank. – This will provide a "margin of safety" in case the April ruble depreciation and the increase in gasoline prices translate into an acceleration of the local CPI. This will also support the attractiveness of ruble assets in the context of toughening of monetary policy in developed and developing countries, as well as instability of global trade and foreign policy relations between key countries."

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