After a long period of monetary easing, the CBRT finally delivered a hawkish surprise and kept its key policy rate (1-week repo rate) unchanged at 8.25%. Along with market consensus we were expecting a 25bp cut from the CBRT. Although the tone of the interest rate announcement note is modestly more hawkish than before, there was no clear policy guidance. The CBRT gave no hint that the easing cycle was over. Given the recovery in economic activity, persisting risks to disinflation, the already negative real interest rates and ongoing capital outflows, the easing cycle may indeed be over. However, we still expect a final 25bp cut and a clearer message from the CBRT on the ending of the cycle within the next three months. We keep our end-year policy rate forecast unchanged at 8.00%, but a rate of 8.25% is almost equally likely.
Looking at the interest rate announcement note, we see three key differences as compared to last month. First, the CBRT has become more confident on the recovery in domestic and external demand. While the Bank was talking about signs of recovery last month, there was this time a clear statement that the recovery has started as of May. The CBRT also mentioned the recovery in exports. Soft data indeed pointed to a rapid recovery in business and consumer sentiment while government officials stated that there was a 34%oya increase in exports in the first three weeks of May. The second change was the more cautious language on inflation. The CBRT, for the first time, referred to the rise in the trends of core inflation indicators and repeated the view that as the normalization process continued, demand-driven disinflationary effects would become more prevalent in the second half of the year.
Lastly, the CBRT omitted the sentence saying inflation outlook was considered to be in line with inflation projections. This may, in our view, imply that the CBRT is not as confident as before on its inflation projections and wants to see a few more activity and price data before having a stronger view on the short term inflation dynamics. Only after then will the CBRT either deliver the 25bp cut we expect and/or state more clearly the end of the easing cycle.
EM, Economic and Policy Research
J.P. Morgan Securities plc
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