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CBR monetary policy report for July


The report is broadly in line with the CBR’s previous statements. "There are no inflation risks from the demand side (as the output gap is slightly negative and expected to remain in 2014) and the behaviour of monetary factors is also beneficial for reaching the mid-term inflation target." Besides, "supply factors (such as harvest) look favourable as well and the probability of a poor harvest is limited."

The CBR itself called the recent monetary policy stance rather tight (based on higher current and anticipated inflation than targeted) and said that it might be shifted to neutral if inflation slows and business activity remains modest. This underpins our estimate of a 75bp cut in base rates. At the same time, the CBR estimates GDP growth at 2.0–2.5% and sees the risks of inflation undershooting the forecasted range as small, a view which supports monetary policy tightness.

Also of note:

FY13 GDP growth is estimated at near 2% YoY.

The CBR does not treat the cuts in medium-term rates in April-June, and the launch of the 312-P 12-month auction facility, as easing, but only as a measure to improve the transmission mechanism.

Only protracted RUB weakening could visibly influence CPI growth, not short-term volatility.

Monetary policy has only a limited effect on smoothing a shock from the supply factors on inflation.

We continue to view the CBR’s current policy as excessively tight and think it is leading to a widening negative output gap (FY13 GDP is to grow only 1.7%, in our view) and increasing unemployment (we expect it to hit 6.2% this year). In such a situation, inflation might surprise to the downside in the coming months which, taking into account labour market deterioration, could trigger excessive easing from the regulator closer to the year-end, thus posing inflation risks for 2H14.

Maxim Oreshkin, Daria Isakova
VTB Capital analyst


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