Unsurprisingly, the Central Bank of Russia (CBR) left all its policy rates and reserve requirements on hold at its rate setting meeting on 30 June. The accompanying policy statement signals a further shift towards a dovish stance, supporting our view that the CBR is done with rate hikes in this cycle (except possibly for deposit rates).
Facts
Refinance, deposit and repo rates remained at 8.25%, 3.5% and 5.5%, respectively. Reserve requirement ratios (RRR) were left on hold as well. In contrast to the previous month, the CBR’s June policy statement dropped a reference to ‘still high inflation expectations’. Instead, the ‘continued foreign economic development prospects uncertainty’ was highlighted as an additional risk for Russian economic growth in June.
Once again CBR confirmed that the achieved balance between the risks of inflationary pressures accelerating and economic growth slowing down at present is conducive to leaving all policy rates on hold in the coming months.
The next CBR Board meeting will take place at the beginning of August 2011.
Implications
We commented extensively on the drivers for CBR’s decision on policy rates in our MPC meeting preview in our daily note on 29 June (HSBC: Russian Economic Insight: CBR MPC Preview: All rates on hold, all eyes on growth-inflation balance). Improved inflationary expectations, mixed recent macroeconomic data releases and fiscal surpluses are the key reasons for the CBR’s decision to take a ‘pause’ for a few months. Comparing the May and June policy statements, the differences in the language suggest the CBR now has become somewhat more dovish than before, apparently being pleased with the inflation trend and concerned about some signs of economic growth weakness.
As before, we do not expect that the CBR will resume rate hikes at all as inflation is to set on a steady yet gradual deceleration trend. That said, we continue seeing a possibility of a 25bp hike in deposit rates in Q4 2011 on the back of the RUB weakness that we expect in H2 2011.
Bottom line
We believe that the probability of the CBR announcing policy rate hikes later this year is lower than it was a month ago. This is what markets have to price in. That said, we do not foresee any strong market moves on the news.