Central Bank of Russia: In search of the neutral level – Nordea

In view of analysts at Nordea Markets, the neutral rate range in Russia may be revised from 6-7% to 5.5-7%, however, it is unlikely to happen before the middle of 2020.

Key Quotes

“Favourable external and internal conditions have allowed the Central Bank of Russia (CBR) to resume its easing cycle in the middle of 2019. In total the CBR has cut the key rate by 125bp since Juneto 6.5%. As a result, the key rate entered a range of 6-7% (or 2-3% in real terms), a level the CBR has referred to as neutral since 2017.  One of the current topical issues for monetary policy in Russia is a potential revision of the neutral range estimate to lower levels.  The CBR has recently acknowledged this possibility. We try to gather pros and cons with respect to a neutral rate revision in this report.”

“The neutral rate estimate is important for market participants, corporates and consumers as it gives an idea about the level at which rates may prevail in the longer term in the absence of major shocks.”

“In sum,  monetary policy normalisation after the crisis in the US has shown that hopes to bring real neutral rates higher than 1% are illusory for now. Still the level above 1% is the basis for the current neutral rate estimate in Russia of 2-3%.”

“The Central Bank of Russia has already cut the rate by 125bp since June. As monetary policy affects the economy with a lag of several months, inflation may return to higher levels in the near future in response to cuts already made. In addition,  the CBR may still cut the key rate by another 50bp before it reaches the lower bound of the neutral range (6-7%). We expect these cuts to take place in the first half of 2020. The effect of cuts already made and 50bp of possible cuts in 2020 may well be enough to bring inflation sustainably to the target.”