CBR Preview - Cautious 50 bp Cut on Friday

The CBR will announce its latest rate decision at 13:30 Moscow time on Friday. We expect it to cut the key rate by 50 bps to 5% and to show a willingness to lower rates to as low as 4% by end-September, implying 50 bp cuts at the next two meetings each. While the bank sees significant scope for further cuts, it does not seem convinced of the necessity to conduct a policy of what would be negative real interest rates. Given the 4% inflation target, this would mean that the CBR is not ready to cut the rate beyond this level. If it opts for a cut of more than 50 bps on Friday, the key rate could reach 4% already in July. The speed of cuts would not make a big difference for long-term OFZs and swaps, though it could spur a correction in these markets when the CBR halts cutting. Faster cuts - meaning an earlier end to the cutting cycle - would weigh on primary demand for OFZs and thus cast doubt over the Finance Ministry's plan to increase local issuance this year. > According to the CBR, inflation is not a risk right now. In May, it decelerated to 0.3% m-o-m from 0.8% in April. According to Nabiullina, disinflation will prevail for some period, which calls for a looser monetary policy from the CBR.> When the CBR cut the key rate by 50 bps to 5.50% in April, it said there was "scope for further cuts." Meanwhile, while presenting a report in the Duma recently, CBR Governor Elvira Nabiullina emphasized that low inflation this year has given the CBR the opportunity to continue cuts, and even to accelerate them. In our view, she was alluding to the shift from cutting by 25 bps per meeting, which had been the standard before the April meeting, to 50 bps.> Over the last month, Nabiullina was asked several times whether the CBR is ready to cut 100 bps at the June meeting. She confirmed that, as in April, such a cut would be discussed among other potential decisions. At her press conference on June 5, she refused to hint whether the probability of a 100 bp cut had risen recently.> Nabiullina has said a cut of more than 100 bps would be justified only by a significant deviation between the CBR's forecasts and reality, which does not seem to be the case currently. In addition, she has commented that the CBR prefers to leave banks time to adjust their products accordingly. We believe that this logic points to 50-100 bp cuts as being optimal.> In our view, a 100 bp cut would decrease demand at OFZ auctions and could even trigger a selloff among foreigners, who would be eager to fix profits if they thought that the rate cuts were close to being wrapped up. The Finance Ministry has placed slightly less than R1.4 trln this year, compared with the R3.8-4.3 trln gross that we estimate it might seek to raise this year, so a drying up of foreign demand could make the placement of long-dated OFZs relatively expensive.