CBR Monetary Policy: Potential impact of the coronavirus
This Friday, February 7, the Central Bank of Russia will hold its Board of Directors meeting on monetary policy. This meeting has the so-called “anchor” status and will be followed by a press conference with Chairperson Ms. Nabiullina. The continuing disinflation favors another rate cut. However, the increasing risk of the coronavirus epidemic's spreading further, which can, among other things, cause a slowdown of global GDP growth, may force the CBR to adjust its rate policy. It is possible that the regulator may send a message that the rate-cut process needs to be paused. In this case, ruble bonds and OFZs may weaken.
--- By the end of January the CPI could have fallen to around 2.5% or possibly even below that level. Moreover, inflation may remain below the 3% level during 2020, which is 100 bps lower than the long-term target set by the regulator. The OFZ market prices in about 75 bps rate cut in 2020.
--- The situation with the new coronavirus deteriorated rapidly during the last couple of weeks. Investor fears may lead to prolonged pressure on commodity prices. For example, Bloomberg commodity index has lost 8% since the beginning of the year. The latter may lead to contraction of the current account surplus and weakening of the ruble.
--- The rhetoric of the regulator will likely be in the focus of investors’ attention. If it turns more cautious due to virus fears, some outflow of foreign money may be observed, moving the OFZ yield curve up by 10-30 bps and weakening the ruble by 1-2%.
--- Domestic liquidity remains high; the amount of CBR bonds in circulation, which can be used as an indicator, reached historical high (R2 trln). These funds may be channeled to OFZ market to compensate a potential outflow of foreign investors.
Now read on...
Register to sample a report