Key events in EMEA and Latam this week

The Bank of Russia is expected to cut the key rate (currently at 5.50%) on 19 June, and we are on the conservative side of the 50-100bp consensus range.

Acknowledging the below-expected CPI growth of 3.0-3.1% YoY and weakness in local demand, the central bank is still quite wary of risks to the Russian capital account. In fact, most central bank decisions in the last 7-8 years could be easily interpreted through the prism of strengthening the capital account.

In practical terms, with net private capital outflows accelerating from a monthly US$4-7bn in the first four months of the year to US$10bn in May, and foreign portfolio inflows to the local public debt stagnating at +US$0.7bn per month in April-May, the central bank may opt to keep the road to the rate floor, which we see at 4.0% in 2021, more gradual.

Additional arguments against a large-scale cut (even though the CBR mentioned the 100bp cut as one of the options on the table) include the activity data for May, the second and final month of the nationwide Covid-19 lockdown, also to be released next week.

• First, the drop in industrial production is likely to deepen from -6.6% YoY in April to -7-8% YoY in May, however, this deterioration will be driven by Russia’s 96-99% compliance with OPEC++ oil production cuts.
• Second, based on high-frequency data, retail trade should somewhat recover from the -23.4% YoY drop in April to -16-17% in May.

In any case, as the central bank's representatives have indicated that in Russia monetary easing would be more efficient when secondary effects kick in, rather than during or immediately after the lockdown. We believe that regardless of the scope of 19 June rate cut, the CBR is likely to maintain a generally dovish tone.