OUTLOOK-US threat of new sanctions against Russia may force the Central Bank to take a pause in rate cut

More than half of those surveyed by Reuters analysts expect that the Bank of Russia at the meeting on Friday, July 28 will take a pause in the reduction of the key rate because of the threat of new sanctions against Russia by the United States and against the background of the tendency towards a slowdown in inflation.

"Significant obstacle (to lower rates) is a tightening of sanctions. In case of signing (the US president of the bill), it will be quite a serious risk to our economy"- said Stanislav Murashov of Raiffeisenbank.

"I think that the Central Bank will wait with reduced rates".

The White House said on Sunday that US President Donald Trump is open to signing a bill toughening sanctions against Russia after the leaders of the Senate and House of Representatives reached agreement on the document.

For keeping the key rate at its current level of 9.00 per cent in favor of 12 analysts polled by Reuters of 21. The rest are waiting for the regulator still will reduce rates by 25 basis points.

For example, Rosbank analysts recognize that "sanctions news" complicate the task of the Central Bank on ways to mitigate the interest rate policy, but believe they will force the controller to refrain from lowering at the next meeting only if the scale correction in the currency and / or the bond market.

In addition to the threat of new US sanctions the most important negative factors that CBR should take into account, analysts appear to lower oil prices and unstable inflation dynamics.

Consumer prices in June rose 4.4 percent over the same period last year. Disinflation trend slowed for the first time in the last 10 months due to the exhaustion of the effects of last year's good harvest and the strengthening of the ruble.

Ministry of Economic Development predicts that by the end of July, annual inflation will slow to 4.0-4.2 percent.

"If you can even find significant arguments in favor of the fact that the June data may be regarded as a temporary phenomenon, the impact of higher food prices should not be ignored, especially if they affect the inflation expectations", - says Ivan Tchakarov of Citi.

"The acceleration of inflation to 4.4 percent in June, the Bank of Russia gives reason to pause in the reduction of the key rate in order to get more information for the assessment of future inflation path"- agrees Natalia Vaschelyuk of BIN.

Controller will make sure that the weather conditions are normalized, and most of the shock rise in prices for fruits and vegetables will be neutralized when entering retail new crop. In addition, the central bank need to understand how a number of factors - on the part of the increase in food prices, the weakening of the ruble, expectations about the rate of the national currency, the growth of tariffs for housing and communal services - influenced the inflation expectations of the population, according to Vaschelyuk.

Industry experts believe that the prices of vegetables in Russia will remain one of the risk factors for inflation until the autumn, when it will become clear whether the decreased harvest or just there was a delay because of rainy weather.

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