The CBR is due to hold a Board of Directors meeting today, 15 June, and decide on key policy interest rates. Currently, the refinancing rate is 8.00%, the one-day REPO fixed rate is 6.25%, the one-day REPO auction rate is 5.25% and the overnight deposit rate is 4.00%.
We expect the CBR to leave all rates unchanged. It is likely to reiterate key statements from its May press release: low IP growth, but high capacity utilisation, tight labour market coupled with fast lending growth and higher inflation risks in the medium term. In addition, the CBR will likely say that prolonged RUB weakness poses additional inflation risks for 2H12. We expect the CBR to drop the sentence “the current level of money market interest rates is appropriate for the coming months”, either this time or in July, in order to increase the flexibility in its decisions. If the CPI exceeds the CBR’s expectations or RUB continues to depreciate, the regulator might tighten monetary policy. We stick to our 7.0% year-end CPI forecast, which is well above the CBR’s target of 5.0-6.0%.
Economy ahead of CBR decision:
CPI stayed at 3.6% YoY in May, but recent statistics on weekly inflation point to signs of acceleration. Monthly CPI of 0.5% MoM would translate into 3.9% YoY in June.
Despite some moderation in retail sales growth (to 6.4% YoY in April from 7.5% YoY in 1Q12), investment dynamics are strong (13.8% YoY in 4mo12) and the resulting internal demand growth is close to exceeding its potential. The slowdown in IP growth (to 1.3% YoY in April) is driven mainly by weak external demand and the CBR does not have a significant impact on this.
The labour market remains tight. Unemployment (5.8% in April) is below the NAIRU level and nominal wage growth is unsustainably high (14.5% YoY in 4mo12), which will eventually translate into higher prices.
Global problems complicate the situation. Worsening current account poses risks for prolonged RUB weakness, which might result in higher inflation during 2H12.