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CBR Monetary Policy Decision – Sacrificing growth on the altar of inflation

On Friday, the CBR decided to keep its monetary policy unchanged.

Despite the negative and growing output gap, the CBR has decided to keep its monetary policy unchanged, aiming to contain medium-term inflation. With this step, the CBR is sacrificing 2013 growth in order to achieve its 2014 inflation target of 4.5%. Taking into account 2Q13 GDP growth as well, we are therefore revising down our forecast for 2013 GDP to 1.7% YoY (from 2.4%) and increasing our YE13 unemployment forecast to 6.2% (from 5.7%).

Comment ambiguity. On the one hand, the first time round, policymakers officially recognised that Russia’s output gap was negative (with worsening labour market conditions) and deteriorating. On the other hand, the CBR stated that achieving its medium-term inflation target (4.5% will likely be announced as the 2014 target instead of the currently indicated target range of 4-5%) is its primary goal. The main reason

given for not proceeding with monetary easing was the necessity of attaining sustainable “favourable trends in the dynamics of inflation expectations”.

No new MTRO auction. The CBR did not announce its second MTRO auction. This does not mean that there will not be one (we believe it is likely to be announced later this month), but it does mean that the regulator is in no rush with its goals to normalise of the refinancing system and monetary policy transmission mechanisms.

What next? As there is no direct link to the official measure of inflation expectations and the decision did not contain any explanation of what “sustainable favourable trend” means, the predictability of CBR policy has significantly decreased. Interviews with senior CBR officials are likely to improve visibility on further monetary policy actions.

Maxim Oreshkin, Daria Isakova
VTB Capital analyst

CBR, Russia

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