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The unabating headline and core inflation forced the Central
Bank of Russia (CBR) to take a firm step by raising its key rate to
7.5%.
By frontloading the monetary tightening CBR aims to anchor
consumer and business inflation expectations, as the headline
annual inflation surged to 7.4% in September, the highest reading
since June 2016.
Both demand- and supply-side inflationary pressures keep the
headline and core inflation well above the central bank's 4%
inflation target.
Bank of Russia could opt for a smaller rate rise should the
inflation rates remain above the current key interest rate in the
coming months.
On 22 October, the CBR's Board of Directors lifted its key rate
by 75 basis points (bp) from 6.75%. The move followed a 25-bp
increase in September and marked the sixth rate tightening since
the start of the year. The accompanying press note by the Board of
Directors after the rate-setting meeting was not dissimilar to
those issued in the past months. The bank reiterated that
inflationary pressures are rising.
Demand continues to outstrip output expansion capacity. The
deviation of the headline inflation from the CBR's target of 4.0%
will persist. The only difference was the CBR's decision to
increase its annual inflation forecast to 7.4-7.9% by end-2021. The
bank kept annual average inflation at 4.0-4.5% in 2022.
This compares to IHS Markit's projections of 7.2% annual
inflation by end-2021. Annual average inflation will stand at 6.4%
in 2021, easing to 4.8% in 2022, under our current assumptions.
The surge in consumer prices through September and the first
half of October was a key trigger for CBR's decisive move to anchor
consumer inflation expectations. Specifically, detailed monthly
inflation data released by the Russian Federal State Statistical
Service (RosStat) showed a jump in the headline inflation to 7.4%
year on year (y/y) in September from 6.7% in August, and 6.5% in
June-July.
Highest inflation since 2016
Food prices were the main driver of the September inflation
increase. Services sub-index also rose. The least inflationary
impulse came from the non-food price sub-index.
For the fourth consecutive month, the core inflation increased
faster than the headline CPI. In y/y terms, the underlying
inflation increased to 7.6% in September from 7.1% in the previous
month and 6.8% in July.
Despite the tightening cycle, monetary conditions showed no
notable changes since the previous meeting, according to the CBR.
Lending remained largely unaffected. Short-term OFZ's (Obligatsyi
Federal'novo Zaima) yields increased in anticipation of a further
key rate hike.
Both commercial and consumer borrowing remained significant.
Still, there were also small inflows of funds into fixed-term
rouble deposits, a trend that the bank expects to solidify in the
coming months due to its monetary policy.
Cash to spend
Inflationary pressures from economic activity remain a concern
for the Russian central bank.
Household incomes benefited from one-off budgetary payments and
rising real wages. Ahead of the Duma elections in September, the
government made USD9.5-billion payments to nearly 40% of the
country's population, including economically vulnerable groups and
military personnel.
High inflation expectations also contribute to increased white
goods and other purchases.
Producer prices bite
Apart from the demand-linked inflationary pressure, CBR sees
inflationary pressures rising from supply side constraints, and
high input costs, which producers transfer to consumers.
Increased labor demand and the fall of the unemployment rate
close to its record lows signal rising labor costs.
Outlook
As expected, after a substantial rate hike the Bank of Russia
took a break until 17 December. Currently, the disinflationary
risks appear on the rise, giving the bank some breathing space.
Specifically, the inflationary impact of the one-off social
payments is fading. The rouble's stability limits import price
inflation risks.
More importantly, economic activity, especially client-facing
businesses, once again face the drag from the pandemic. To combat
the third wave of the coronavirus disease 2019 (COVID-19) virus,
Russia entered a week-long strict lockdown on 28 October.
On the flipside, worsening pandemic and the lockdown could
trigger yet another round of domestic supply disruptions and
related price increases. Therefore, further policy tightening is
still on cards but should they happen, the rate hikes will be
smaller and wider paced.
Posted 03 November 2021 by Lilit Gevorgyan, Associate Director – Russia and CIS, IHS Markit
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May 23
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