CBR Chairman Sergey Ignatiev made a number of statements yesterday. He reiterated that the CPI target for this year remained at 6.0%, while a weaker RUB would have a limited effect on prices. He also mentioned that FX interventions remained limited and had reached USD 600mn in the past three days, as the CBR’s policy is aimed at smoothing volatility on the FX market (and not at defending any particular level), while the stability of money market rates is a priority.
We agree with the regulator that the effect on CPI dynamics of shortterm spikes in the RUB exchange rate is low, as Russian economic agents have in recent years became more tolerant of FX volatility (thanks also to significantly increased hedging volumes by importers). However, if RUBBASKET stays above 36 for most of 2H12, a weaker RUB would ultimately lead to higher inflation, although the impact would be rather limited (we estimate a passthrough effect from the exchange rate to CPI of 0.05-0.10).
We view the CBR’s inflation target of 6.0% as slightly aggressive and are maintaining our year-end forecast at 7.0%. Strong wage growth, the base effect in food prices and planned regulated tariff hikes are likely to lead (eventually) to a significant increase in YoY CPI, especially in 3Q12. In such circumstances, we would not rule out the CBR returning to interest rate hikes later this year in an attempt to achieve its CPI target.
The CBR’s interventions on the FX market over the past few days have been less than expected, supporting our view that the regulator’s priority is to stabilise interest rates rather than the exchange rate. This fact is positive for the dynamics of the Russian economy later this year. In 2008-09, the spike in interest rates was one of the primary reasons behind the deep economic slump. This time, until the external shock is absorbed by modest RUB weakening, the impact on the economy’s dynamics is likely to be limited.