Commerzbank’s Tatha Ghose expects the Russian central bank to deliver another 50bp rate cut, though a pause is possible as inflation picks up and global price risks worsen. Ghose sees further easing framed as a wartime compromise, but anticipates a less dovish tone and continues to forecast USD/RUB trending higher toward 100.0 over the coming year, with timing highly uncertain.

CBR cuts, inflation risks and sanctions scenarios

"Today’s Russian central bank (CBR) meeting will probably deliver the usual ‘symbolic’ 50bp rate cut. The market consensus unanimously expect this. We ourselves would not be surprised if CBR were to skip this rate cut as inflation dynamics have speeded up because of rising food and commodity prices, while the economy does not need as much urgent support in the near-term because of the windfall from the higher oil price."

"The reduction would, however, align with CBR's general dovish shift in recent months, confirmed by Governor Elvira Nabiullina's stated confidence that interest rates can continue to fall in future meetings. Minutes from the February meeting underscored this, based on signals from a variety of high-frequency indicators, which boosted CBR's conviction that inflation was moving favourably. Since then, there was some volatility, but the latest weekly price data has turned benign once again as the oil price has come off its March highs."

"As such, rate reductions are seen as the pragmatic compromise balancing strict inflation targeting with the real economy's wartime needs, also influenced by political pressure for lower interest rates."

"However, despite the expected cut, market commentators anticipate that the CBR will send a less dovish signal this time because the global inflation outlook has changed for the worse. CBR may now say that it needs to maintain tight monetary policy for longer and hint at a potential pause in rate cuts until later in the year."

"We continue to expect USD-RUB to trend upwards towards 100.0 at some point over the coming year, barring a positive outcome on the peace treaty front. On the other hand, USD/RUB could even fall in the interim if the US were to exempt sanctions on Russia more widely because of an energy market crisis of its own making. Hence, the timing of a move up towards 100.0 appears ever unclear."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)