CBR Press Conference Review - Rate Cuts to 4% by End-2020 Looking More Likely

Today, CBR Governor Elvira Nabiullina held another regular press conference (now every two weeks). She said there was "substantial scope" for rate cuts, but remained elusive about whether the CBR would deliver a 100 bp cut on June 19. We believe that the base case for the bank is a 50 bp cut. That said, we now see a greater likelihood that the key rate will end the year at 4.00% instead of 4.50%, as we had expected before. In addition, we think sales of the FX received by the CBR in the Sberbank stake deal will remain supportive for the ruble through the summer. The next CBR press conference will take place after the rate decision. > Disinflation. Nabiullina attributed the recent pickup in weekly inflation (to 0.1% each of the last two weeks) to the quarantine measures being relaxed, but said that the data might be somewhat distorted ("noisy"). Next week, the bank will evaluate how significant the general slowdown in inflation is based on the May inflation data (to be released today). Currently, the bank seems to believe that disinflation is proceeding somewhat faster than it had expected at its last meeting on April 24, when it cut the key rate. One factor has been the strengthening ruble, but mostly this was due to declining demand in the economy. > Inflation expectations. Inflation expectations rose slower in the first weeks after the quarantine started than the CBR expected back in April, and have already started falling. Nabiullina said that there were not specific expectation levels at which the CBR would cut rates more aggressively. > Rate cuts. Nabiullina said that the current economic data points to "substantial scope" for rate cuts. She had not used the word "substantial" in her last press conference. However, when asked directly whether the likelihood of a 100 bp cut at this month's meeting had risen, she said only that such a cut was a possibility, but that the decision would be made at the meeting itself. We continue to believe that 100 bps is not the base case for the CBR. In addition, when asked whether a cut of more than 100 bps was possible, Nabiullina said that the CBR would prefer to avoid a sharp rate cut. She pointed out that a big rate cut would narrow margins for banks. In her words, the CBR could act aggressively only if the current situation were to significantly diverge from its expectations. This does not seem to be the case, we think. > Economic recovery. Although the CBR does not think there will be a quick V-shaped recovery, it also does not expect to see stagnation (an L-shaped formation) after the lockdown measures are fully lifted. It appears to see the recovery as somewhere in between those two. > Banking sector. Nabiullina said the situation with liquidity and funding for banks was stable. She pointed to signs that lending was livening up, supported in part by government subsidized loan programs (for example, in the mortgage market). Meanwhile, demand for loan repayment holidays was falling. She reported that R510 bln of retail loans had been restructured and R587 bln of loans to SMEs. She also indicated that the possibility of banks paying out dividends would be considered on an individual basis based on just how much the quality of assets had worsened. She said 4Q20-1Q21 would likely mark the peak of loan quality worsening. She reported that most big banks have heeded the regulator's recommendation to put off dividend payments for 2019 and that no systemically important bank had violated the capital requirements, which set limits on dividend payments. The CBR is planning to gradually remove the regulatory forbearance measures, though comments on the potential use of capital buffers have been very cautious. > FX. Nabiullina disclosed that the CBR had sold $4.3 bln, or about R330 bln, out of the R2.14 trln in foreign currency equivalent received from the National Wealth Fund for the sale of its 50% stake in Sberbank. She said some R1.8 trln of FX proceeds remain and could be sold by September 30 if Urals drops below $25/bbl. After this date, the CBR will announce how exactly it will sell this volume, as it is likely to remain unchanged until then given the recent oil price recovery.We had previously estimated that the bank had sold $8 bln of the FX proceeds from the Sberbank deal, calculated as the difference between the CBR's and Finance Ministry's FX operations between March 10 and May 12. In March, the Finance Ministry was slated to purchase R6.3 bln of FX from the CBR, and in April the ministry began to sell FX at a rate of R3.5 bln per day. In March, the CBR began "preemptive" FX sales in the market in line with the budget rule, and these sales most likely ended in early April, when the ministry began selling FX to the CBR; starting on March 19, it began to carry out additional FX sales related to the Sberbank stake sale, while Urals stood below $25/bbl. The $4.3 bln figure is probably the difference between the actual and the "preemptive" FX sales by the CBR in March-early April, plus the difference between the actual volumes sold by the CBR on the market in April and FX sales by the ministry to the bank during the same period.Given the current USD/RUB rate of around 68, the CBR has still to sell about $26 bln related to the Sberbank deal. Meanwhile, it still needs to purchase around $20 bln to make up for the break in purchases in 2018. We expect these volumes to be squared off at some point in September provided that oil prices remain at current levels. Nevertheless, even after this, the CBR will still have to sell around $6 bln. This is a relatively small amount, but selling this volume, or reducing the volume of FX purchases under the budget rule if the oil price exceeds the base level, will support the ruble. We therefore expect the ruble to firm to 64 by the end of the year.OUR VIEWThe CBR already now sees increased scope for rate cuts. If previously our base case was that the key rate might be cut to 4.50% by the end of this year, now we are leaning toward a view that it will be lowered to 4.00%. Slower price growth, a stronger ruble and weakening inflation expectations may allow the CBR to move toward a more accommodative policy. On the other hand, the bank remains cautious and doesn't yet appear ready to cut by 100 bps or more at a time. We therefore stick to our forecast of a 50 bp cut this month.