Russia’s central bank cuts interest rate by 25bp to 8.25%

The Central Bank of Russia (CBR) decided to cut the key interest rate by 25bp at the board of directors meeting on October 27, the regulator said in a much anticipated press release.
A rate cut of 25-50bp was widely expected by analysts as the inflation-minded regulator had the annual inflation overshoot its target of 4% currently amounting to about 3%.
A more aggressive cut of 50bp would have meant that the CBR could prepare to tighten the policy again in the beginning of 2018, some analysts suggested. However, the CBR decided to abstain from an aggressive move and cut the rate by the minimum step of 25bp to 8.25%.
“The CBR’s decision to lower the key rate by 25 bps to 8.25% is in line with market expectations, but turned out to be more cautious than we anticipated,” Gazprombank commented on October 27.
“The board of directors noted that inflation remains close to the target of 4%,” the CBR press-release reads. The CBR argues that the “downwards deviation of inflation is related mainly to one-off temporary factors”.
The regulator has allowed for further rate cuts in the coming meetings in 2017. The decision will take into account the “significant and stable” deviation of inflation from its goal, as well as dynamics of economic activity.
Gazprombank sees that tone of the CBR’s press release as mixed. On one hand it sees the current strong disinflation as temporary and reminds of consistently high inflationary expectations. On the other hand, in medium-term persective risks, both the downsides and upsides of inflation deviations from the 4% target are mentioned.
“Moreover, for the first time in its communique, the CBR included a phrase regarding transition from “moderately tight” to “neutral” monetary policy, which in our view indicates a smooth reduction of the real key rate from the current level of 5.6% to the equilibrium 2.5%,” Gazprombank commented.
Gazprombank expects a 25bp reduction of the key rate at a base case scenario given no negative surprises for the next meeting scheduled for December 15. VTB Capital agrees saying: “We see a 25bp cut at the December meeting as a base case,” on October 27.
“The incoming data for October and November might nudge the Board to opt for a more ambitious cut of 50bp, but this would call for surprises from inflation reports, banking stats and economic activity data to combine into a convincing case,” VTB analysts commented.
The CBR expects inflation to end 2017 at 3.5-3.8%, while the Ministry of Economic Development that needs lower interest rates to help its ambitious 2.1% growth outlook expects 2.7-3.2% inflation in 2017.

Resource: http://www.intellinews.com/russia-s-central-bank-cuts-interest-rate-by-25bp-to-8-25-131492/?source=russia

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