SOVA Capital believes Bank of Russia's next move will be a rate cut

Central Bank of Russia's recent decision to hike rates does not foreshadow that more interest rate hikes lay ahead, analysts at Sova Capital said.

On 14 September, CBR surprised all of the economists tracking it - save one - with a 25 basis point hike in its main policy rate, the one-week repurchase rate, to 7.50%, although Governor Elvira Nabiullina had reportedly flagged that possibility a week earlier.

Some analysts were also surprised by the magnitude of the central bank's upwards revisions to its forecast for consumer prices in 2019, with policymakers now predicting CPI could rise to between 5.0% to 5.5%, versus 3.1% in August.

However, for Daria Isakova, Senior Economist at SOVA Capital, the decision to hike was a "one-off move in response to a significant deterioration in the external environment."

Indeed, her expectation was that CBR would return to an accommodative bias once disinflation took hold.

"For another hike to happen in Russia, there should be another spike in inflation expectations (for example, a further intensification of capital outflows from EM could create such a risk)," she told WebFG.

"The spike should be severe enough to jeopardize the new CBR inflation outlook of 5.0-5.5% for 2019, that is highly conservative, to become a trigger for an additional hike."

Isakova pegged the probability of such a scenario materialising at 20%.

In terms of the outlook for the Russian currency, the rouble, the economist believed spot US dollar-rouble was likely to be trading at between 66.0 to 67.0 roubles at year end-2018.

The risk of further sanctions did exist, and had increased the country risk premium, as did favourable tailwinds, including CBR's decision to stop its purchases of hard currency for Russia's National Wealth Fund for the time and higher crude oil prices, Isakova said.

"We see a couple of ruble supporters: no FX purchases from CBR on the open market will be automatically beneficial for the ruble this year and high oil," she explained.

She also expected the risk of fresh sanctions to "gradually moderate" following the US mid-term elections on 6 November.

That, she explained, would help the rouble to narrow the gaps which had opened-up vis-a-vis its emerging markets peers as well as against other oil exporters.

Looking out to 2019, Isakova was anticipating that the rouble could benefit from a lack of further negative news from abroad, predicting that it would strengthen further against the Greenback by year-end 2019, to trade between 62.0 to 63.0.

Among the assumptions underlying her projection for the rouble's exchange rate against the US dollar next year were: a resumption of CBR hard currency purchases for the National Wealth Fund, a gradual tightening of Russian CDS spreads, a stable US dollar and a slight decrease in Brent oil prices to $70 per barrel.