As was widely expected, the CBR kept rates on hold last Friday, taking comfort from the current scale of tightness. Policymakers strengthened the message that RUB remains the key for now, and in light of inflationary and financial stability risks, the regulator does not intend to cut rates in the coming months. Looking towards the yearend, rates are set to remain high in the short term, normalisation is conditional on geopolitical developments and under the base case the CBR is to deliver easing gradually in 2H14.
Tone on economy/inflation mix remained almost the same. The CBR recognised downside risks to the economic growth outlook on the back of heightened uncertainty and tightening financial conditions. On the inflation side, the rhetoric remains hawkish with upside risks mainly stemming from recent RUB depreciation. Nevertheless, the CBR expects disinflation over the second half to bring headline CPI back to its medium-term targets.
Outlook. A growth inflation trade-off is clearly of limited relevance for the policy outlook in the near term. But for what it is worth, we agree that a period of stagflation over the next several months (as the uncertainty shock hits demand, while a weaker RUB is transmitted into retail prices) will be followed by significant disinflation over 2H14-1H15. Hence, policy normalisation is on the cards, but as it can be read in relatively hawkish inflation language, it is unlikely to be pre-emptive and aggressive, but rather gradually spread throughout the year, and particularly in 2H when inflation embarks on a clear declining trend.