Uncertainty shock hits. There are many signs that the economy is now being hit by an uncertainty shock. Faced with heightened uncertainty, firms are delaying investment and hiring, while households choose to postpone discretionary spending.
Recession hard to escape. Domestic demand is set to halt on the uncertainty shock and tighter financial conditions, likely dipping the economy into a recession over 2Q-3Q14. We are lowering our FY14 growth outlook to 0.0%, and see downside risks if uncertainty remains elevated for a protracted period and/or severe sanctions are imposed.
Inflation to pick up in near term before dropping in 2H. Inflation has been picking up since February, as prices for the more exposed (and least FX hedged) categories have adjusted upwards. A weaker rouble, however, is yet to be translated into the broader consumer basket, and is to push headline CPI to 6.5-7.0% over the coming 2-3 months before disinflation hits with a vengeance in 2H14.
CBR to stay put on both rates and rouble for now. Savings dollarisation and tighter funding conditions on the external markets are likely to keep pressure on the rouble before geopolitical tensions ease. These outflows are unlikely to be sensitive to interest rate hikes and, hence, the CBR will have to accommodate it via FX interventions. The very near term risks are tilted to more tightening, and if tensions calm, monetary easing is likely to be gradual and spread throughout 2H14.