Rates Weekly - July 7, 2020

> Ruble liquidity: Expectations of key rate cut, sufficient liquidity to weigh on O/N rates again. Last week, O/N rates fell gradually from about the key rate of 4.5%, a high level caused by tax outflows, to a quite low 4.0-4.1% due to a high liquidity surplus at the end of the reserves averaging period. Given the high oversubscription for the CBR's weekly deposit auction in the upcoming week and at the beginning of the new reserves averaging period demand for liquidity could stay subdued due to expectations of a cut to the key rate. We think the market may start expecting a 50 bp cut if the CBR hints at a more decisive move later this week. Moreover, this week we estimate banks' reserves at the CBR to be slightly above the required level. Against this backdrop, over the next seven days we expect O/N rates to stay low at about 4.1-4.2%. > OFZs and rates: This week's June inflation data could bolster our expectations of a 50 bp key rate cut at the CBR's July meeting. Disinflation probably continued in June once one-offs are adjusted for. Given the recent data from the CBR and the Finance Ministry suggesting that the recovery in the retail sector may have already petered out, with retail sales still below the pre-Covid levels, we expect the CBR to cut the key rate by 50 bps in July, which the bank may signal after the June inflation report is published. The continued spread of the epidemic in the Americas is another reason for the CBR to move to further stimulate the Russian economy. The Finance Ministry has decided to offer the new 5y floating-rate OFZ 29014 (March 2026) at tomorrow's auction without a limit. Last week, it managed to place only R17 bln of the similar OFZ 24021. We do not expect tomorrow's issuance to exceed R20 bln, even if market conditions improve.