The Central Bank of Russia is widely expected to continue to lower rates aggressively to support the economy exit recession. June data releases confirmed that the recession was likely worse in Q2 than in Q1. The Iran deal (combined with renewed worries about the Chinese growth outlook) has sent the price of Brent down and that caps the prospect for a powerful recovery. “The central bank of Russia should continue to lower rates, to 9.00% by year-end, disinflation remains powerful and the CBR needs to help the economy to exit the current recession”, said Credit Agricole CIB in a report on Thursday.Recent inflation numbers in Russia show that disinflation is alive and well. Apart from a strong but temporary price rise during the week ending 6 July, which was on account of tariff hikes, sequential inflation has remained low. Weekly inflation is at about 0.1% w/w in recent weeks, consistent with annualised inflation at about 4.5% to 5.0%. Retail sales decreased by -9.4% YoY and investment decreased by -7.1% YoY.Macroeconomic data in recent weeks has further heightened the case for a weaker currency and lower interest rates. The CBR’s 1W repo rate remains high at 11.50%. The resulting 650bp gap (a proxy for the actual real policy rate) looks much too high compared with distressed economic activity. In light of such data some help from easing monetary conditions would be welcomed. Analysts maintain rate call according to which the CBR will continue to lower the 1W repo rate aggressively for the remainder of the year. Not only do the authorities remain comfortable with some controlled weakness, but the level of oil prices means there is additional RUB weakness. RUB could depreciate further before it stabilises. In addition, the forthcoming US Fed rate hike may weigh on other EM currencies and suggests the RUB would also have to weaken so that the real effective exchange rate does not appreciate. However, it is also believed that further depreciation will be controlled, as the central bank does not want to generate imported inflation. “The RUB to depreciate vs USD to 60.0 in September 2015, before it recovers to 58.0 at end-2015 and 55.0 at end-2016”, added Credit Agricole CIB.At 0850 GMT, the rouble was 0.2 percent stronger against the dollar at 57.32 but had lost 0.5 percent to 63.02 versus the euro. The rouble had lost 0.9 percent against the dollar on Wednesday, dragged down by sinking oil price.
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