The tepid outcome of the first 12-month 312-P auction and widening output gap is likely to result in more decisive steps from the regulator. We expect a 25bp cut in all rates and the announcement of a second MTRO auction. We do not exclude the possibility that the CBR might go with a one-time 50bp cut, and believe that it could loosen conditions for the MTRO auctions (lower premium over the auction repo rate and the possible of launch of three- and a six-month 312-P auctions).
Pre-decision economy and inflation situation. We believe that Russia’s economy has entered the summer on a slow note and that the current weakness is mainly driven by internal demand, as the external environment has remained bleak but stable (the growth in natural gas output even recovered in July after 1H13 low levels). Labour market conditions continued to worsen: following hidden deterioration at the beginning of the year (higher part-time employment, shorter workweek), in recent months the problem has become visible, with an increase in SA unemployment. Being a lagging indicator, we believe that unemployment will continue creeping higher in the next several months, while wage growth is set to slow. Together with the recent decline in capacity utilisation, this highlights that the economy is running a negative output gap and that the situation is continuing to deteriorate. On the inflation front, despite prolonged rouble weakness, core inflation has decelerated which, combined with the favourable base effect in food prices, has brought the headline CPI to 6.5% YoY. As current trends will likely persist, achieving 5.0–6.0% by YE13 is now almost inevitable.
Maxim Oreshkin, Daria Isakova
VTB Capital analyst
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