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April's increase will likely be short-lived

According to Rosstat, CPI was reported at 0.5% MoM and 7.2% YoY in April (from 0.3% MoM and 7.0% YoY in March), in line with our and market expectations. The key growth drivers were food prices accelerating to 8.8% YoY (from 8.3% YoY in March) and services tariffs to 8.1% YoY (from 7.9%YoY). Meanwhile, non-food prices slowed to 5.1% YoY (from 5.2%). Rosstat’s core inflation edged up a mere 0.1pp to 5.7% YoY in April.

The pick-up in headline CPI in April was mainly driven by the acceleration in fruit and vegetables prices (which came earlier than in 2012) and slightly more expensive services. The main negative surprise was that VTBC core inflation edged up, but mainly owing to higher prices on foreign tourism, which we treat as a one-off linked to the weaker RUB in April. The same story occurred in February and, to recap, in March our core indicator normalised, proving the one-off nature of February’s increase.

The CPI report might check the CBR’s stance. We suggest that GDP growth is running below its potential, and advocate that monetary easing will hardly pose visible inflation risks, but would help the economy. However, April’s increase in headline CPI might raise the CBR’s concerns (that still focus on short-term headline CPI behaviour, not the medium-term core inflation trend) and force it to postpone bold monetary easing until the summer. However, we believe that this uptick is short-lived and the favourable base effect in food prices as well as further deflation in gasoline prices will likely ensure disinflation in the months to come. We are therefore reiterating our forecast of a 25bp cut in rates (a cut in policy rates of 25bp again, this time including short-term repo rates) at the CBR’s May monetary policy meeting. 

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

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