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Financial News: Russia CB Likely To Cut Key Rate By

Russia CB Likely To Cut Key Rate By 25-50 Bps

06/15/2017 - 08:06:00 (RTTNews)

(RTTNews) - Russia's central bank is widely expected to cut the key interest rate by 25 basis points to 9.00 percent in June, as disinflation stopped in May, while a half-point call could be justified, Danske Bank Senior Economist Vladimir Miklashevsky said in a report last week.

The Russian central bank is set to announce its monetary policy decision on June 16.

The economist expects high real rates to prevail over this year, supporting the ruble and the oil decoupling.

Miklashevsky said the inflation approaching the central bank's target of 4 percent for this year could be a main reason supporting a cautious quarter-point cut.

Inflation held steady at 4.1 percent in May, thus halting disinflation, as food and vegetable prices increased.

Further, the colder-than-usual spring could accelerate food inflation due to a poorer harvest versus 2016, the economist pointed out.

"The CBR usually acts in advance to curb any acceleration in prices, which are caused by the supply side shock," Miklashevsky said.

And the cautious stance of the bank as described by Governor Elvira Nabiullina who cited high inflation expectations also support the call for a 25 basis points cut.

Meanwhile, sliding inflation expectations and dovish comments by Nabiullina are reasons in favor of a half-point reduction, Miklashevsky said.

Further, the continued decoupling of the ruble from the oil price that is driving down the crude price, thus posing a challenge for the budget in the long term, also support a 50 basis point cut.

"We continue to expect the CBR to deliver 25bp in cuts at the meetings in 2017, as the crude oil price is set to increase moderately, lowering inflation expectations and balancing the oil price in RUB," the economist said.

Danske Bank expects the key rate to be cut to 8.00 percent by end-2017 and to 7.00 percent by late 2018.

"Given dovish pricing by markets, a 25bp cut would result in a temporary strengthening of RUB on CBR's reconfirmed cautiousness," Miklashevsky said.

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