Thought on Russia's Repo Rate Cut

Russia cut its repo rate yesterday (25 bp to 5.25%), the first cut in 15 months. It is tempting to put it in the context of Turkey and Brazil's recent rate cuts. However, we see Russia's move in slightly different terms. It seems to be more of a technical response to the tighter ruble liquidity than a bona fide move to ease monetary policy.

There are a number of factors, including less central bank dollar and euro sales last month (lowest since January) as well as global issues, that has drained liquidity from the banks. Evidence of this needs was seen in this week's auction for the placement of excess government budget funds. The auction for RUB20 bln was oversubscribed 5-fold. Usually the bid-cover is closer to 2:1.

While cutting the repo rate, the central bank also raised the discount rate (25 bp to 3.75%), which also is consistent with drawing more funds into the system. If the price of oil falls significantly, we expected Russia to truly easy monetary policy. The RUB 30-day correlation with WTI continues to be in the 0.60-0.70 range that it has been in since late June.