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Macro week ahead – weekly inflation is worth monitoring


This week is fairly light on the data front, with the weekly inflation print of most interest. In the meantime, the local market is likely to continue watching the reaction to recent and potential rating actions.

Local newsflow on the economic data front is rather subdued this week with the weekly CPI estimate the only highlight. The fact that inflation has accelerated visibly since December is of little surprise given the exchange rate weakness, but the magnitude and/or speed of the pass-through surprised on the negative side. It is too early to conclude whether the main reason behind the surprise was speed or the overall magnitude of FX pass-through, the latter being a less welcome development. Weekly CPI prints in this light provide the most timely monitoring of inflation trends at the moment. We note that last week already saw some moderation of sequential inflationary pressure and it would be a relief for the CBR if this trend were sustained, coming on top of anecdotal evidence (normalisation of spending behaviour) that devaluation/inflation expectations are starting to abate.

Amid a relatively uneventful calendar, market attention will likely focus on developments on the energy markets and rating actions. Stabilisation in the oil market might have provided the much needed relief if it were not for another unexpected rating decision – Moody's downgraded Russia’s sovereign rating to the lowest investment grade and placed it on review for further downgrade (see Credit watch story ). Hence, now two agencies – S&P and Moody's – are threatening to downgrade Russia's sovereign rating to below investment grade. To remind, S&P previously indicated mid-January as the likely timeline for the completion of its review (the most recent media reports suggest the end of the month), whereas Moody's did not comment on the timeline, but if history is any guide it usually takes up to 2-3 months.

We note that Moody's specified i) a more pronounced erosion of FX reserves and/or ii) fiscal balance than is currently expected by the agency as potential triggers. As regards the former, Moody's now expects a similar to last year (USD 125bn) drawdown of reserves in 2015. This comes in light of the fact that almost half of the capital outflow (according to the fresh BoP numbers) was related to savings dollarization – and hence, is less likely to be repeated in the environment of very high interest rates – providing some leeway. On the second trigger, however, Moody's now expects the general government deficit to widen to only 2% of GDP this year, which could hardly be reached without sizable spending cuts to the approved budget plan. The authorities recently signalled readiness to cut fiscal spending by up to 10%, but we need to wait for the final decisions, as consolidation of this magnitude is likely to involve politically sensitive defence and social spending. In any case the ball is now in MinFin's court – not only from a ratings standpoint, but also from a wider macroeconomic perspective, as uncertainty over the composition of fiscal consolidation (spending cuts / tax hikes / debt monetization) needs to be lifted.

Vladimir Kolychev
VTB Capital analyst

inflation, CPI

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