CBR Preview - CBR to Opt not to Cut on Friday, Leave Door Open for October (corrected version)

We expect the CBR to keep the key rate unchanged at 4.25% at Friday's meeting, citing subsiding short-term disinflationary risks, a faster than expected economic recovery and recent ruble weakening. However, we think such a decision would be accompanied by the bank, concerned about disinflation for the rest of the year, signaling its willingness to consider a cut at the next meeting in October.> When the CBR cut the key rate by 100 bps from 5.50% to 4.50% in June, it also changed the phrasing of the statement, going from saying it "allows for [the possibility of] further key rate cuts at coming meetings" to saying it would "judge the prudence of further key rate cuts at coming meetings." The market took the change to mean that the CBR wanted to slow down cuts. In fact, at the next meeting in July, the CBR cut only 25 bps to 4.25%. Meanwhile, the forward guidance was left unchanged in July, so the market has been expecting another 25 bp cut at Friday's meeting to 4.00%.> Since the July meeting, the macro backdrop has changed to a certain extent. The ruble has become more volatile amid rising imports due to the economic recovery, seasonal dividend payments by Russian companies, falling exports and rising geopolitical risks. Since mid-August, the local currency has traded in a wide range of 73.4-76.6 to the dollar and is now roughly 5% weaker since the July meeting. However, the depreciation has been much more subdued than this spring at the peak of the pandemic or than during the last episode of rising geopolitical tensions back in August 2018. > Meanwhile, inflation seems to be picking up. The CBR has said that disinflationary risks weakened somewhat in August thanks to pent-up demand, the ruble weakening and the general economic recovery. Yet, the recovery has been uneven: on the one hand, government fiscal stimulus has boosted consumer demand in 3Q20, especially for non-food products, driving consumer price growth; on the other hand, some services, investment and oil production (affected by the OPEC+ deal) remain subdued, dragging on the recovery. > Last week, CBR Governor Elvira Nabiullina said that, though the CBR indeed sees some room for further cuts, it would have to weigh when exactly to "use" this room and whether using this room would be prudent in general. In separate remarks, CBR Deputy Governor Alexei Zabotkin repeated that the CBR would "assess the ability to soften monetary policy and the necessity and time frame for cutting rates." He cited a faster economic recovery, faster consumer inflation and overall lower disinflationary risks than had been expected by the CBR in July. > Overall, CBR officials have become more cautious, indicating that a rate cut on Friday might not be necessary. They could be trying to downplay expectations related to the unchanged wording in the July statement and to show a readiness to halt easing for an indefinite period.> We now believe that the most likely outcome on Friday is no change to the key rate. That said, the CBR might keep the same wording in the statement while following it up with guidance from Nabiullina that rates could be kept unchanged at the next meeting in October as well.