Russian Central Bank Is Likely To Keep Main Policy Rates On Hold

Despite the fact that we currently find Russian monetary policy to be excessively tight, we expect the Russian central bank (CBR) to keep all its key policy rates unchanged on Monday. There are several factors backing our view.

First, Russian inflation remains high (7.4% y/y in May). Even though it seems like a done deal that inflation will decrease significantly in July, the CBR `stated that inflation expectations might rise in the instance of rates being lowered in a high-inflation environment. Second, the June meeting will be the last under the current governor, Sergey Ignatiev. Thus, we expect him to refrain from making any significant changes to policy. Third, lower deposit, repo and refinancing rates do not seem to be a sufficient solution in the current monetary environment. Overnight rates in the interbank market remain one percentage point above the central bank’s repo rate. As the CBR’s goal is to keep money market rates close to the repo rate, we expect the central bank to try to find ways to ease monetary conditions in the interbank market. Currently, it seems to be the case that many banks are short on collateral that could be used for borrowing via the CBR’s repo facility.

Even though we expect several rate cuts in the second half of the year, we now expect the rate cuts to materialize only when inflation is already at a lower level. Moreover, as food prices are a very important factor in the Russian CPI basket, the CBR might want to wait for some information on this year’s harvest. Therefore, we believe the first rate cut of 50bp is likely to come in August.

South African central bank steps in to calm the markets
South African Reserve Bank (SARB) governor Gill Marcus spoke out twice this week in reaction to the recent sharp sell-off in South African assets in an attempt to calm the markets. Following the first speech – in which she said that risks to inflation are skewed to the upside and that despite the central bank being likely to cut the GDP forecast due to the strikes the bank’s core mandate is price stability – yields went up as the market started pricing in rate hikes quite aggressively. However, later in the week Marcus tried to put more light into what she said earlier this week, and basically said that the markets had misinterpreted her previous comments and while inflation risks are on the upside, the bank can tolerate inflation at the upper limit and that monetary policy remains accommodative.

What SARB governor Marcus tried to say on Thursday was that while room for further manoeuvre (further easing) is very limited, she indicated that markets should not price in early rate hikes as monetary policy remains accommodative. Her comments bode well for our outlook for monetary policy in South Africa as we expect the SARB to stay on hold throughout 2013. The outlook for the rand remains the same. We remain bearish on it, and do not consider the recent sell-off to be a buying opportunity. The continued domestic socio-economic problems, uncertain outlook for global monetary policy, drop in commodity prices. Last but not least, the unsustainably high current account deficit represents risks for further depreciation of the rand.

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