Tatiana Evdokimova, Nordea’s Chief Economist on Russia, suggests that in Russia inflation is still at a record low despite the RUB depreciation in April, but they don’t expect the CBR to cut its key rate next Friday.
Key Quotes
“The central bank of Russia (CBR) is to decide on its key rate next Friday. At this point in time the outcome is highly uncertain. Still record-low inflation (2.4% y/y in May) calls for a cut but we see more reasons for it to remain unchanged at 7.25%. At the same time the CBR could resume its easing cycle very soon. We still expect the key rate to drop to 6.75% by year-end.”
“The main factor behind our reasoning is inflation expectations dynamics. The latest data for May showed an acceleration of this indictor to 8.6% after a historically low level of 7.8% in April, reflecting households’ reaction to the recent RUB weakening as well as rapidly rising gasoline prices.”
“Even though in y/y terms inflation is still quite low (2.4% y/y in May versus the target of 4%), inflation pressure is starting to build up. Seasonally adjusted month-on-month inflation increased to 0.38% on our estimates in May which equals 4.7% in annualised terms. Given these developments mostly driven by rising gasoline prices (+5.6% in May) and RUB weakening, inflation is likely to move back at a brisker pace to the 4% target in the second half of the year.”
“If we are right and the CBR keeps the key rate unchanged, the RUB could strengthen a bit as a reaction to the key rate decision as some market participants may expect a cut given the still very low year-on-year inflation numbers. Even though we expect an “on-hold” decision, the press release is likely to be relatively dovish as inflation is doing better than expected at the previous CBR meeting, proving its resilience to external shocks.”
Share
