Overall, her tone was relatively hawkish, which is not a surprise given the traditional ultra-dovishness of the Duma audience. Nabiullina repeated the argument about slowing potential growth and inflation risks related to monetary easing. We have said time and again that inflation is unlikely to be an issue on a 12-15-month horizon and the risks of undershooting the inflation target are significant. We believe the CBR is behind the curve and the rate cutting cycle is only a matter of time: a first cut in late 1Q14, when there is enough evidence of slowing headline CPI, still looks a reasonable expectation.
In our view, the most interesting development was that lawmakers demanded the CBR pay more attention to core, rather than headline, inflation. Although Nabiullina reiterated that headline CPI was the main target, she conceded that the CBR would be giving core inflation a closer look and discussing it more broadly in its policy documents. This is important as, given that ‘true’ core inflation is already close to the 2016 inflation target (4.5-4.0%, depending on the measure), it will become harder for the CBR to justify its relatively hawkish policy stance.
On the idea of capping interest rates in retail lending, the CBR repeated its previous position that it supports capping as one of the measures to abate consumer lending expansion. Meanwhile, many banks have already reduced the growth of their portfolios by tightening subscription requirements in the weakening macroeconomic situation. All in all, in 2014-16 the CBR expects moderate banking sector portfolio expansion of 10-15%.