Analyst: There will be no sharp cut to the key interest rate in December.

      In December the Bank of Russia will hold another meeting on the key rate. Currently it stands at 16.5%. We turned to an analyst with the question of what decision is expected in December and why.

      Natalya Milchakova, lead analyst at Freedom Finance Global:

      “We believe that with approximately 75% probability the Bank of Russia’s board of directors at its December 19 meeting may again lower the key rate, but by no more than 0.5 percentage point, to 16% per annum. It is also possible that the decision will be completely different, that is, that the Bank of Russia will take a pause following the board meeting and keep the key rate unchanged, but we assess the probability of that outcome at only 25%.

      In October annual inflation slowed to 7.7%, which gives the Bank of Russia’s board a strong argument in favor of continuing to lower the key rate. Weekly inflation in November also remains low and is falling week by week. At the same time, seasonally adjusted inflation (excluding seasonal and other one-off factors affecting consumer prices) has long reached the level of 4% per annum, which, accordingly, is relevant for further monetary policy easing.

      On the other hand, the Bank of Russia’s board may also have arguments in December in favor of a pause in cutting the key rate. The first argument is the rise in consumer inflation expectations in November from 12.6% to 13.3%, according to inFOM. Another argument is the increase in month‑on‑month inflation in September and October (in October month‑on‑month inflation rose to 0.5% compared with an increase of 0.37% in September). Undoubtedly, an important argument is the forthcoming VAT increase from January 1, 2025 — and in the first quarter of 2019, when VAT was last raised, there was indeed a short‑term inflationary effect on the economy. However, in any case we expect, with almost 100% probability, that there will not be a sharp cut in the key rate (that is, of 1 percentage point or more) in December 2025, and the key rate will not fall below 16% per annum that month.

      We believe that the Bank of Russia’s decision to slightly lower or to keep the key rate unchanged will have a positive effect on the ruble. In December we expect the exchange rate to be in the range of 78–84 rubles.”