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CBR’s Dilemma — despite softer internal demand growth, labour market is still tight

Yesterday, we published Russian Economy Monthly: September 2012 CBR's Dilemma

July’s statistical data showed demand-side indicators slowing down. Industrial production rebounded, but was mainly driven by the calendar effect. We expect growth to moderate further in 2H12, as the increase in fiscal expenditures is losing momentum, agriculture output is affected by weather conditions and export demand remains weak, while lending activity and consumer confidence are to be hit by the local/global uncertainty and ongoing pass-through of recent monetary policy tightening to real economy.

Until we see some pick up in unemployment, wage growth is likely to remain high, posing risks of a wage-inflation spiral. Hence, labour market tightness and strong wage growth point to the above-potential utilisation of resources in the sector.

July’s increase was driven by a combination of the regulated tariff hike and strong food price growth, with food prices to play a key role in August. The acceleration in food CPI in recent months (we expect it to reach 6.6% by the end of August) was mainly driven by the elimination of two factors: high food prices in 1H11 (a result of the 2010 drought) and low food prices in 2H11 (due to the good harvest last year). The impact of the problems with this year’s harvest have just started to feed into the CPI growth rate.

On the back of global factors (better risk mood and stronger oil prices), RUB spent most of the month in the no-intervention zone. As budget sterilisation of liquidity intensifies due to seasonality, the cost of the regulators’ funds has increased. Thus monetary policy is actually tightening without any change in policy rates. This, combined with the CPI ready to exceed the end of year target and the slowing economy, seriously complicates the CBR’s base rates decision at its policy meeting in mid September. 

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

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