WOOD Flash – Russia macro: CBR cuts policy rate by 25bps – monetary policy to remain the playmaker in the coming year

The Central Bank of Russia (CBR) has decided to reduce the policy rate by 25bps, to 4.25%, in line with our expectations. The decision was accompanied by further dovish signals, as the board indicated room for further easing, while also reducing inflation projections for this and next year. While these developments are in line with our expectations, in recent weeks, we have turned more cautious on the prospects of significant changes to the budget rule and, consequently, on the magnitude of further fiscal stimulus. In addition to the referendum victory (please see our recent flash note for further details, published on 9 July), there are two additional factors in play. The first one is a rapid widening of the budget, at a faster pace than we had estimated. The government is working on a plan to postpone the objectives of the National Projects already, to avoid the budget blowing up excessively. Furthermore, still on the budget, the Ministry of Finance has proposed to reduce expenditures, in 2021E, by RUB 1.4trn. The second reason is our belief that the administration is hedging against an increase in sanctions risks. Russian billionaire Deripaska has stated, in an interview with BFM, that a Biden administration – which is becoming more likely, according to recent polls – could lead to DASKAA sanctions in March-April 2021E. All these elements strengthen our belief that we will are unlikely to see changes in the fiscal framework, make us turn more cautious on the possibility of additional focused spending to foster the recovery and, as a result, also strengthen our belief that the main expansionary policy tool, going forward, will remain monetary policy.