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Ulyukaev considers 2% as a CPI target from 2016

 
08.02.2013
The CBR's First Deputy Chairman Alexey Ulyukaev met with journalists on Wednesday and mentioned that the long-term inflation goal after implementing the inflation targeting framework in Russia (the goal for 2016) might be set at 2% (+/- 1%).

There are two important implications of a 2% CPI target.

In order to achieve such strong disinflation in the coming years, the CBR would need to conduct a tight monetary policy for a long time and keep economic growth below potential (less than 3.0% for the next several years). Such a scenario potentially implies higher real and lower nominal rates, weaker economic growth, lower inflation and a stronger currency.

It is potentially supportive for long-term bonds, if delivered credibly. If the CBR reaches this goal and brings long-term inflation expectations to the same low level, long-term yields on OFZs might decline to 5%, well below the current level of above 7%.

In our view, such a low inflation target is harmful for the economy, as an optimal inflation rate for economies in which big structural shifts are underway (and are likely to be underway for years to come) is not lower 4%. Such economies typically experience wider price growth distribution among different types of goods and services. Achieving a 2% target would mean that a wide group of goods and services were in deflation mode, which is definitely negative for potential growth.

We do not expect such a low inflation target to be set in Russia, and see the recent announcement as part of a political game to protect the regulator’s current hawkish stance and allow the CBR to negotiate a higher inflation target (we expect it to be set either at 3-5% or 3.5-5.5%).

As of now, we are maintaining our call for 75bp in rate cuts this year and growth accelerating into the year-end. Recent CBR proposals will likely be discussed in the coming months, giving additional support to long-term RUB-denominated bonds.

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

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