Russia’s macro policy: A peculiar mix of lower rates and FX interventions
As the markets expected, the CBR cut its key policy rate by 50 bps on April 24, hinted at more rate cuts of around 100 bps, and announced that monetary policy is becoming more accommodative. This is undoubtedly a strong positive message for the OFZ market, which had rallied a lot in anticipation of the meeting; yields compressed by 60-70 bps in the long end of the curve since Ms. Nabiullina’s previous press conference on April 17. This trend is highly likely to continue in the coming weeks. During periods of strong expectations of a rate cut, the 10-year OFZ spread to the CBR key rate fluctuates around zero. If to assume that the key rate ends the year at the 4.5% level, then the 10-year OFZ yield would not be higher than 5%, which leaves room for another 100-120 bps yield compression.
The CBR released its updated medium-term macroeconomic forecast, which looks mostly reasonable, although not immune to puzzling messages. The regulator expects Russia’s GDP to contract by 4-6% this year and household consumption to shrink moderately amid a deeper investment contraction. Next year, the regulator sees most of these variables strongly bouncing back. The CBR forecasts exports to drop by more than 10% this year and imports to contract less – by 5.6-11.6%. As a result, the trade balance and the current account are supposed to shrink quite dramatically. We expect different trends on the end-use side of GDP, such as a deeper contraction of imports and consumption but some increase in net exports as a result.
* Having a strongly negative current account for two consecutive years as the CBR currently plans (in 2020 and 2021) should in fact mean that some fundamental change in monetary policy has to occur.
* One of the key ideas behind the fiscal rule was to smooth real exchange rate fluctuations (as it was emphasized by the authorities) in an environment of oil price volatility, i. e., to prevent its excessive appreciation or depreciation when the oil price goes up or down. This idea was popular in the government circles when the oil price fluctuated within a range but at much higher levels (say, from $45/bbl to $80/bbl).
* If the $20-45/bbl Urals price range becomes a “new normal” (even for a year or two, as the CBR forecast suggests), then that kind of vintage fiscal rule will make little sense and it looks set to be abolished or modified at some point.
* If the exchange rate adjusts by around 10% from the current level, it will return closer to levels seen in 2015-16 in real terms. Indeed, an economy lagging so far behind global growth barely deserves a stronger real ruble, particularly in the current low oil price environment.
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