A surprising twist in CBR policy was the emergence of a completely new goal to boost FX reserves to the $500bn level. According to the CBR, that level is"comfortable" from a financial stability perspective and should be achieved within a 5-7 year horizon.



"The CBR also stated that such an effort should not compromise the existing inflation targeting mandate, which remains the primary goal for the CBR. The existing disinflation momentum in the CPI trend should push inflation all the way down to 5.1% yoy in 2016 eop, right next to the CBR's ambitious 4% inflation target for 2017", argues Bank of America.



However, the CBR's new FX reserves policy goal might soon become an important inflationary risk that at some point might start to constrain thepotential for further rate cuts in 2016 and 2017, even despite the likely low inflation (see Gearing down for big targets).



The goal suggests net issuance ofaround RUB6,000bn in fresh RUB liquidity, which could start to create renewed inflationary pressures by re-accelerating money supply. Such issuance couldpotentially double the current size of M0 (RUB6,6tn as of 1 May) and is equivalent to roughly 20% of M2 (RUB32.1tn as of 1 May 2015). Even spread out over 5-7 years, such money supply growth could still be sufficient to compromise the ambitious 4% inflation target, especially taking into account that the CBR's ability to sterilize such liquidity inflows will be quite stretched by the Reserves Fund use, says Bank of America.



Forecasts:



Both RUB and local bonds have room for further consolidation, according to Bank of America. CBR actions and commentary clearly indicate diminished scope for RUB gains and there is scope for some disappointment on sanctions at the June EU review. Upcoming negotiations with Iran also pose a risk to oil and RUB.

Oil and the lingering Ukraine crisis remain two key risks to the real GDP outlook in 2015. Another spike in political risks could trigger a new round of capital flight, sanctions pressure and a decline in investment, adds Bank of America. A deeper slide in oil prices could do the same by undermining corporate profit growth and supporting inflation through FX weakness.

Risk: