CBR Review - CBR Presses Pause on Rate Cuts, May Hit Play in October

The CBR left the key rate at 4.25% at its meeting today but continues to signal that a cut to 4.00% is possible. We expect this next cut to come in October and still see the CBR beginning to raise rates in mid-2022, though we think this will be done at a gradual pace of 25 bps per quarter, meaning the key rate could reach the neutral level of 5% in 2H23.> In its statement, the CBR kept the phase that it would "judge the prudence of further key rate cuts at coming meetings." We believe this indicates that the bank will consider two options at its next meeting on October 23: keeping the key rate unchanged again at 4.25% or cutting by 25 bps to 4.00%. The CBR cited a faster than expected economic recovery and recent ruble weakening for its decision. It reiterated that medium-term disinflationary risks continue to prevail, despite a recent uptick in inflation, which was probably due to the relatively fast pace of the economic recovery. This means that the CBR will retain the option to cut the key rate if there are signs that inflation is beginning to ease again. We currently expect the next cut to come in October. > In its base case, the CBR still sees room for a further easing in monetary policy, though Governor Elvira Nabiullina indicated in her press conference today that most of the easing had already been done and that the central bank would need to "evaluate the feasibility and the timing for using the remaining room." > When asked whether the CBR would begin to start raising rates in late 2021, Nabiullina indicated that rates would begin to rise again in the second half of the three-year period of 2021-23, meaning after the middle of 2022. She said that the key rate would most likely return to the neutral level by the end of 2023. We still believe the CBR will begin raising rates again in mid-2022 and that this will be done at a gradual pace of 25 bps per quarter, meaning that the key rate could reach the estimated neutral level of 5% in 2H23. > According to Nabiullina, the Finance Ministry's issuance of OFZs is not a factor in the CBR's decision-making. She categorically dismissed the possibility that the CBR may start QE to support OFZ placements. > The CBR will publish its projection of the future key rate trajectory, but it has not yet decided when and in what form. Nabiullina said that this would not represent forward guidance or something the CBR would necessarily have to adhere to in the future. > Nabiullina neither confirmed nor denied that the key rate could be brought below 4%, which to us suggests there is a chance that it could be, potentially. > The CBR does not incorporate the risks of new lockdowns in its base scenario, but Nabiullina said that if such risks were to materialize and disinflationary pressure were to intensify the CBR would need to cut rates lower than is currently envisaged in this scenario.