This Friday (11 September 2015) at 12:30 CET Russia's central bank (the CBR) will announce its monetary policy decision. the key rate to is expected to remain unchanged at 11% p.a. in line with consensus, as RUB volatility has increased (although bearably) on recent global and Chinese woes, which are negatively affecting commodity prices. At the same time, Russia's CPI increased on further RUB weakening, climbing to 15.8% y/y in August, from 15.6% y/y a month earlier.

Economists believe that the CBR will refrain from rate cuts in September to keep the Rouble (RUB) market calm and be consistent with previously declared targets. The decision will be followed by a press conference and the quarterly monetary policy report, which will reveal possible changes in the CBR's stand. Yet, near term, similar hikes in the CPI to those seen early 2015 is not expected. Thus, upcoming price increases is expected to be more moderate than in early 2015, as the RUB devaluation has already been transferred to consumer prices.

At the previous meeting on 31 July, the CBR reiterated its CPI forecast for June 2016, stating that annual inflation will fall under 7% reaching the 4% target in 2017. We see its call on inflation as extremely dovish, supporting the further easing of monetary policy after September 2015. Medium term, the CPI is expected to slow down and the CBR to resume its monetary easing, which has been badly needed.

"We expect the key rate to fall to 10% this year and 7% in late 2016, which would support the restoration of economic growth," commented Danske Bank.

At the moment, the CBR is paying much more attention to economic growth prospects than to inflation figures. In our view, any tightening would be very destructive for Russia's economy, while it would not prevent possible RUB weakening if the oil price continues to fall.

As the Iran deal and turmoil in China's stock market have recently pushed commodity prices lower, the falling oil price is dragging the RUB down. Over the past 30 days, the Russian currency has lost more than 6% against the USD.

We continue to expect a moderate weakening over the next six months to 72 against the USD. The major upside risks for our USD/RUB forecast are the Fed's more aggressive than expected rate hikes and continuing fall in the oil price," added Danske Bank.