Thursday, June 9, 2016

A fully priced-in rate cut is on cards in Russia

From Saxo's Trading Floor blog, June 9:
  • Higher oil and lower inflation allow room for cut
  • The need to keep rates high to attract capital not so pressing any more
  • Overseas analysts expect a 0.5% rate increase on June 10
  • Domestic analysts expect central bank to hold its fire
After almost a year of keeping the Russian key rates at 11% it seems to be the time for a cut and the central bank might have run out of excuses not to do so. 

The main concern has always been the low level and the volatility of the oil price. The oil price risks might have subsided, at least superficially, until the next big scare (either way). But for now, the $50-plus per barrel oil price has reduced the pressure on the rouble and subdued the volatility it has been suffering.

Needless to say, higher oil means a lower budget deficit (all else being equal), again reducing the need to print roubles, which makes the Russian currency weaker. 

An unexpected boon is a much lower probability of a rate hike in the US. This should prompt some reversal of capital back to emerging markets, including Russia. Again, good for the rouble and government bond yields. It should also make it less necessary to keep the Russian rates high to attract foreign capital.

The looming EU referendum in the UK on June 23 (and related risks) might be a consideration for the Russian central bank, but it is unlikely to be a swing factor. The direct impact on Russia of whatever decision British voters make should be very limited. 

There is also a matter of market consensus. The majority of analysts expect the central bank to cut the key rates by 50 basis points (0.5%) to 10.5% on June 10. 

Table. Consensus forecasts for key rate decision on June 10, 2016
x  Source: 
Geographically, opinion on whether or not the bank will move is divided. Forecasters at domestic financial institutions mostly expect no action from the central bank, the majority of analysts at the foreign banks see a 50 basis point cut. It seems that from outside prospective, a rate cut makes a bit more sense.

The central bank might still have concerns over inflation, which remained at 7.3% y/y in May. On a monthly basis, consumer price index (CPI) was up 0.4% month-on-month both in April and May....MORE