Commerzbank\u2019s Tatha Ghose reports the Russian central bank cut its key rate to 14.0% despite raising its 2026 inflation forecast and projecting stagflationary macro conditions. He argues the easing cycle suggests political pressure and would normally hurt FX valuation, but stresses USD\/RUB and EUR\/RUB are artificial rates, so the move should not significantly affect the Ruble\u2019s market value.<\/p>\n
Rate cuts under stagflationary outlook<\/p>\n
“The Russian central bank (CBR) cut its key rate by 25bp on Friday to 14.0% even after raising its inflation forecast. The outcome was not expected by the majority, but was always a scenario within the range of expectations. CBR raised its 2026 inflation forecast to 6.0%-7.0% from 4.5%-5.5%, blaming the considerable rise in fuel prices, while still claiming that inflation will return to the 4% target in 2027.”<\/p>\n
“CBR lowered its 2026 GDP<\/a> forecast to 0.0%-1.0% from 0.5%-1.5%, cut the oil-price assumption for taxation to USD 60\/bbl from USD 65\/bbl, and reduced the current-account surplus projection to USD 48bn from USD 72bn. In short, the macroeconomic outlook<\/a> is stagflationary.”<\/p>\n “CBR appears to ex-post justify the rate cut by arguing that underlying inflation will be contained: SAAR inflation averaged 5.0% in Q2 after 8.7% in Q1 (core inflation slowed to 4.2% from 6.2%). Measures of underlying inflation reportedly continue in the 4%-5% annualised range.”<\/p>\n “But this defence is not fully convincing. Recent inflation accelerated in June-July, reaching 5.9% as of 20 July, and inflation expectations of households, businesses and financial market participants went up. If expectations remain elevated, CBR itself admits that this may impede a sustainable slowdown in inflation.”<\/p>\n “Still, the FX market does not like a central bank which is under political pressure to lower interest rates. In any normal market, a central bank cutting rates while raising inflation forecast would hurt credibility and weigh on FX valuation. Russia is not a normal market. USD\/RUB and EUR\/RUB are artificial exchange rates, and this decision will not impact RUB valuations noticeably.”<\/p>\n