The Russian central bank (CBR) meets today for its monthly rate decision: the median consensus expectation is for a 100bp rate cut to 16.0% key rate, although some forecasters anticipate the rate being left unchanged. The ratio of analysts expecting a rate cut has significantly increased in recent days as government officials, industry and think tank groups have heaped criticism on CBR’s high interest rate amidst an economic downturn. Think tanks have warned that stubborn inflation dynamics mean that CBR might even hike the rate – and that this would be an utter disaster, Commerzbank's FX analyst Tatha Ghose notes.

USD/RUB exchange rate to reach the 90.00 level in coming months

"CBR itself sees inflationary risks: underlying measures of current price growth have not moderated much recently. Core inflation is indeed being pushed up by one-off factors, and we can observe a sharp rise in inflation expectations of companies and professional forecasters. CBR may also fear an increase in the fiscal deficit by the end of this year and early next year due to advance payments. Hence, from a strict inflation targeting point of view, CBR may need to maintain monetary conditions as tight as possible in order to return inflation to the target by 2026. In similar circumstances, CBR has often acted more hawkishly than even the market’s most hawkish forecast."

"In those earlier times, CBR’s own stance would have been the predominant variable – sporadic government appeals for lower interest rates would get no consideration. But these are no ordinary times. Russian monetary policy dynamics have now completely changed because government and industry pressure on CBR has been mounting, and more observers seem to agree with the criticism. Arguments for a cut include restrictive access to credit amidst weakening in demand and corporate stress. President Putin voices support for CBR’s policies, but his language is also getting more ambiguous recently."

"Forecasting this rate decision has become more difficult than usual for this reason. We lean towards a 100bp rate cut. With further US and EU sanctions mounting on Russia and the peace talks faltering, the fundamentals for the rouble exchange rate are deteriorating. We forecast the ‘artificial’ USD/RUB exchange rate to reach the 90.00 level in coming months."