OREANDA-NEWS. February 24, 2010. The CBR has lowered its key policy rates 25bp, effective 24 February (450bp in total since April 2009). The refinancing rate now stands at 8.50%, the one-day repo rate at 5.75% and the one-day deposit rate at 3.25%. The decision was likely expected, as the CBR hinted yesterday that it could lower rates in February.

In its press release, the CBR for the first time indicated that the next interest rates decision meeting is to take place in March. The regulator also mentioned that the risk of inflation exceeding the official forecast (6.5-7.5% YoY) in 2010 was low and that the rate cut might support local demand and discourage short-term capital inflows. We think that the key reasons for the 25bp cut were the recent rouble appreciation and still declining inflation.

Fighting RUB appreciation, controlling money supply. The RUB appreciated about 0.4% to 34.87 against the basket yesterday. This suggests that the CBR likely shifted the floating corridor for the rouble 15 kopeks, from 35.0 38.0 to 34.85 37.85. We think the CBR might frontload 100bp of extra rate cuts this year in order avoid excessive rouble appreciation and to tame capital inflows. This would in turn allow the regulator to limit FX interventions, control money supply growth and, hence, reduce the risks of higher inflation in 2H10.

Capital inflows might resume in March-April. We expect capital inflows to intensify once the sovereign Eurobond is placed (March-April) as it is likely to release the external borrowing that is currently being postponed. The recent decision by the Fed to start tightening monetary policy might of course curb some extra global liquidity and help the CBR to limit capital inflows.

Real interest rates still high, providing more incentives for rate cuts. Bank lending rates continue to decline (340bp to 13.7% in 2009) in line with falling policy rates and inflation. However, they remain significantly higher than inflation (corporates still pay close to a 6% real interest rate). This creates additional incentives, in our view, for the CBR to continue cutting benchmark rates.