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CPI in August not a help for the CBR

According to Rosstat, CPI was reported at 0.1% MoM and 5.9% YoY in August (a uptick from the 1.2% MoM and 5.6% YoY in July), below our expectations of 6.0% YoY. Food inflation shot up to 6.5% YoY (from 5.5% YoY) but decreased 0.5% MoM on seasonal deflation in fruit and vegetables. Services tariff inflation edged up marginally to 6.2% YoY (from 5.9% YoY), while non-food inflation slowed to 5.3% YoY (from 5.5% YoY). Core inflation advanced to 5.5% YoY in August, from 5.3% YoY in the previous month.

While the latest inflation numbers do not point to an acceleration or deceleration in prices growth, Russia’s inflation continues to run high compared with other EMs. It is also above this year’s and, especially, next year’s official CPI forecast. The annualised SA MoM growth of our core inflation index over the past several months has run above the 6.0% level, significantly exceeding the target for core CPI of 5.5% YoY for this year and 5.0% YoY for next year.

Hence, the regulator might use this report as an excuse to:

– hike rates as a credibility-building measure given that i) headline and core CPI have approached the upper bounds of the CBR’s year-end forecast (6.0% YoY and 5.5% YoY, respectively) and ii) another wave of regulated tariff hikes on 1 September would likely push both indicators above the CBR’s targets; or

– keep rates unchanged (growth in the economy and lending is slowing, liquidity conditions are tightening, fiscal conditions are less supportive for growth, the increase in CPI indexes is driven by temporary food shocks, and the acceleration of core inflation is driven by food items, which are occasionally included in this indicator).

The probability of the latter is increasing. The lending report is due out this week and, if it is at least as weak as in July, that might lead us to revise our September policy meeting expectations from a 25bp rate hike to ‘no change’. 

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

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