Russia’s central bank surprised many in May by cutting its key interest rate by 100 basis points while still conveying a cautious approach. Recent data indicates that another rate cut may occur on 25 July, following gentler consumer price index (CPI) numbers. Russia’s inflation rate, adjusted for seasonal changes, dropped to 4.5% in May, down from 6.2% in April, getting closer to the 4% target. This trend suggests that year-on-year inflation could fall within the lower range of the central bank’s 7%-8% forecast for late 2025.

Forecast Update

Expect updates to the forecast before the next meeting. The USD/RUB exchange rate is not anticipated to change significantly because of these developments. In May, the Bank of Russia unexpectedly lowered its main interest rate by 100 basis points but communicated a more cautious policy tone. This contradiction primarily stems from the recent drop in inflation, which is edging towards its target. The annualized inflation rate, after seasonal adjustments, fell to 4.5% in May. This is a significant drop from April’s 6.2% and brings the rate close to the target of 4%. This indicates that the central bank’s strict inflation measures are beginning to produce results. If these numbers hold or decrease slightly in June, the central bank may consider easing again during the 25 July meeting. Current projections suggest inflation will be in the 7%-8% range by the end of 2025. However, recent reports hint that the actual outcome could gravitate closer to 7%, or even lower, if the current trends continue and geopolitical issues remain under control. The central bank plans to update these forecasts before the next policy review, and we will be attentive to any downward adjustments in inflation expectations.

Rouble Stability and Investment Strategy

The rouble is likely to remain stable. Despite the May rate cut, the USD/RUB exchange rate has remained mostly unchanged. Currency fluctuations are currently influenced more by trade flows, sanctions, and commodity prices than by interest rate changes. Therefore, we do not expect sharp movements as a direct result of monetary policy shifts. Given the recent cautious tone and steady foreign exchange response, we recommend a careful approach for positioning in interest rate instruments. It would be wise to monitor forward rate agreements and expectations in rouble-denominated futures as we approach the July policy decision. There may be opportunities if rates ease further without a change in policy tone—a divergence that could lead to market moves depending on how the yield curve reacts and how much easing is already factored in. We will closely watch any comments from Nabiullina in the coming days, particularly ahead of the forecast release. Any inconsistency between her statements and the economic data could signal early opportunities. Much depends on the July CPI numbers and the updated macro forecast. Any policy changes will likely be considered carefully, especially after the significant cut last month. We should also think about how these developments may affect implied volatility. If short-term interest rate movements become more frequent or unpredictable, options related to these rates might see significant shifts. Low implied volatility at this point could provide a good entry point, especially given the mixed messages from the central bank regarding easing and vigilance. Timing will be critical. Stay adaptable in your positioning, particularly at the front end of the yield curve. If we see surprises like we did in May, yields could respond quickly, leaving little time for adjustments. Create your live VT Markets account and start trading now.

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