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CBR Monetary Policy Preview - No surprises ahead of the holidays

Today, the CBR policymakers are to decide on the benchmark rate.

The regulator explicitly signalled last time that no cut was possible until at least June. On the opposite side of the policy reaction spectrum, rate hikes are only possible if there is significant pressure on the currency. Thus, the status quo is likely to be preserved and complemented with hawkish inflation rhetoric. Beyond April, policy normalisation is unlikely to come to the agenda before late 3Q14, when inflation could well abate and there might be more visibility on the external front.

Pre-decision economy snapshot. The short-term growth story is that of reaction to the uncertainty shock. And while companies seem to have been scaling back capex, consumer discretionary spending picked up on concerns of looming price hikes for imported produce, thus helping to smooth the slowdown in 1Q14. Entrepreneurs’ confidence appears to have been dented significantly by rising uncertainty, while the latest surveys did not reveal any material shock to households’ confidence. However, consumption is unlikely to remain resilient and looking into 2Q14 we expect consumer spending to slow significantly on softening income and credit growth, as well as a pick-up in the savings ratio; thus, a technical recession is still on the cards.

Pre-decision inflation snapshot. The pace of inflation has been picking up since February and as of 21 April was running around 7.2% YoY. The key drivers behind this upturn are a broadening FX pass-through and several idiosyncratic shocks on the food market (mainly pork and dairy). In particular, last month the impact from a weaker rouble reached a wider range of core CPI items and spurred a slightly stronger upward trend in core inflation, with annual growth edging up to 4.7% from the 4.5-4.6% seen over the previous six months.

Daria Isakova, Vladimir Kolychev
VTB Capital analyst


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