The CBR is due to hold a Board of Directors meeting today and decide on key policy interest rates. Currently, the refinancing rate is 8.00%, the 1-d REPO fixed rate is 6.25%, 1-d REPO auction rate is 5.25% and ON deposit rate is 4.00%.
We believe the CBR will leave all rates unchanged, but expect its press release to be more hawkish in tone. Our base-case scenario envisages a new round of monetary policy tightening in 2H12, with 50bp hikes in all key policy interest rates. However, we believe the regulator will likely want more reasons for tightening, as despite the currently aggravating risks for the CBR’s CPI estimation of 6.0% YoY at end-2012 and robust consumption performance supported by lending growth, sustainability of supply side and the global crisis environment might be a serious concern for the regulator. Hence, we expect the CBR to drop the sentence, “the current level of money market interest rates is appropriate for the coming months” from its statement in order to increase flexibility in its further decisions.
Economy ahead of the CBR’s decision: CPI accelerated to 4.3%YoY in June from 3.6%YoY in May and recent statistics on weekly inflation point to the direct effect of tariff hikes (+0.8% 1-9 July). Monthly CPI of 1.2-1.3%MoM would translate into 5.5-5.7%YoY this month.
IP rebounded in May. However, PMI pointed to weaker activity in the manufacturing sector in June, making the CBR more comfortable in its cautious stance.
Robust retail sales and investment growth in May indicate internal demand growth is above potential and will likely prompt inflationary pressure and import growth.
Unemployment (5.4% in May) is below NAIRU and nominal wage growth is unsustainably high (14.9%YoY in 5mo12), which coupled with retail lending at a pre-crisis highs, will eventually translate into higher consumer prices. Global problems complicate the situation. Narrowing CA surplus poses risks for prolonged RUB weakness, which also might result in higher inflation in 2H12.