Russia: Key rate unchanged, cautious optimism prevails

The CBR's decision to keep the key rate unchanged at 7.75% is in line with the unanimous market consensus and our expectations.

Also as expected, the tone of the commentary has become more optimistic regarding the near-term CPI trend, as the monetary authorities mentioned:

• Current CPI at 5.3% YoY as of March 18 being below expectations, as the effect of a VAT hike (0.6-0.7 pp) has been smaller-than-expected and muted by the rouble's appreciation and a stabilisation in local gasoline prices
• Inflationary expectations by households and corporates have improved recently
• Global market conditions have improved materially year-to-date, thanks to a revision of the expected Fed rate trajectory

At the same time, the longer-term signal, having also improved, remained cautious. This is also in line with our expectations but might disappoint some market participants, who expected the CBR to return to the rate-cutting cycle soon:

• The CBR's year-end 2019 forecast has improved from 5.0-5.5% to 4.7-5.2%, which is in line with our expectations, but less aggressive than the 4.5-5.0% rate expected by some market participants
• The CBR reiterated that a full assessment of the VAT's inflationary effect will only be possible in 2Q19
• The CBR again cited uncertainty regarding the global risk appetite due to geopolitical factors and a potential slowdown of global economic growth
• The CBR mentioned that inflationary expectations, despite the recent decline, remain elevated and unanchored

We believe there are a couple of upside risks to CPI, which the CBR did not include in the official press-release but are still worth taking into account:

• Higher than expected capital outflows in 2M19 highlights the risk of reversal in the [currently disinflationary] RUB trend following a very successful 1Q19
• The local gasoline price freeze, which also prevented a stronger acceleration in overall CPI, expires next week, with no indication so far, that it will be prolonged
• The slowdown in household RUB savings growth to 5-7% YoY in nominal terms amid an acceleration in retail loan growth to 23% YoY points to pressure on the savings rate
• Social policy initiatives by the president, combined with the scheduled increase in public sector salaries later this year, suggests there is a possibility of a pick-up in consumer activity in 1H19, removing some of the current demand-side constraints to CPI growth later this year.