RUB: Domestic story and high rate differentials supports bullish outlook - Danske Bank

Analysts from Danske Bank remain bullish on the Russian ruble on the long-term. They consider an escalation of geopolitical issues and tumbling oil price as downside risks to the outlook. 

Key Quotes: 

“On 16 June, the CBR cut its key rate by 25bp to 9.00%, as we and Bloomberg consensus expected. The CBR’s tone was cautious as disinflation has stopped, while an acceleration in food inflation in Q3 17 could pose additional inflation risks. We expect the CBR to continue its moderate cuts, bringing the key rate to 8.00% by end-2017.”

“Inflation fell from 7.3% y/y in May 2016 to 4.1% y/y in May 2017. In its June 2017 monetary policy report the CBR introduced a new indicator to follow regarding monetary policy – 12M rolling inflation – which will be monitored together with thecurrent 4% y/y target for December CPI. As current inflation has been hovering almost around the conventional target, the CBR wants to anchor long-term CPI around 4% y/y, which explains better the central bank’s objective.”

“We remain bullish on the RUB in the long term, as high rate differentials prevail and the domestic story supports the currency. Short- and medium-term prospects are murkier, however, as external factors such as the oil price and geopolitics put notable pressure on the RUB.”

“An escalation of geopolitical issues and a tumbling oil price remain downside risks to our GDP growth and RUB forecasts: the oil price remains shaky on the Fed’s monetary tightening and abundant supply; the US is keeping its hawkish stance on Russia, mulling new anti-Russia sanctions, which could depress the appetite for ussian assets.”