The tone of the accompanying rhetoric suggests that the regulator is trying to strike a delicate balance between growth and inflation risks, but stands ready to tighten in case the inflation outlook deteriorates. Looking ahead, we do not expect rate changes over 1H14 as we do not think recent RUB weakness puts the inflation target at risk.
CBR signals readiness to tighten on inflation outlook. The second round effects of an acceleration in food inflation at the end of last year, as well as the pass-through from a weaker RUB at the start of 2014, are the main risk to the inflation outlook, according to the CBR. Should it find evidence that these factors are starting to contaminate broader inflation expectations, it stands ready to tighten policy. In our view, the key message from the reference to the possibility of policy tightening is to confirm that the CBR believes it is reasonable to overweight inflation in its reaction function during the transition period to inflation targeting when it has to build credibility.
Outlook. As signalled by the regulator, the next rate move is to a large extent conditional on the second round effects of food CPI and currency weakness on broader inflation. None is our forecast (and the CBR's, at the current stage), so we do not expect any rate changes in the coming quarters. Were the headline CPI persistently to exceed the regulator’s expectations, which lie within the 5.8-6.1% range over 1H14, that might constitute a trigger for a rate hike though. Next week, the CBR is due to release its quarterly monetary policy report, which we expect to bring more insight as to the regulator’s inflation forecasts, as well as its main underlying assumptions.