CPI inflation in Russia in August 2013 remained moderated to 6.1% y/y and 0.2% in m/m terms, according to the report by RosStat. Previously in July and August inflation stayed unchanged at 8-month low 6.5% y/y. In May annual monthly inflation hit 21-month high at 7.4% y/y.

September’s inflation moderation was in line with the expectations by EconMin and analysts surveyed by Prime. Despite the price pressures of the upcoming holiday season the inflation is expected to moderate further and to comply with the Central Bank of Russia (CBR) target. The CBR expects that the price growth is going to gradually decline to the target 5%-6% range by the end of the year.

Inflation jumped in the beginning of 2013 due to increase in excise duty on alcohol and growing food prices, much above the official target of 5%-6%. In 2012, after a surge to 6.6% y/y in September CBR upped the refinancing rate by 25bps to 8.25%. Price growth froze and remained fluctuating around 6.5% y/y until the end of 2012.

In June, July and August the high consumer price growth moderated expectedly as effect of last year’s drought and poor harvest on high food prices wears off. In September food prices remained flat in m/m terms and moderated to 6.3% y/y from 6.5% y/y in August and 9.2% y/y peak in May. Services’ and non-food prices' growth also decelerated to 7.8% y/y and 4.7% y/y in September (8.7% m/m and 4.9% y/y in August).

As inflation slowed down below 7% y/y in June, a more pronounced monetary stimulus was expected from the new CBR administration recently headed by ex-EconMin Elvira Nabiullina. However, on the meetings of the BoD in July and August the central bank did not cut the main interest rates, although continuing softer monetary cycle with an introduction of new liquidity instruments.

In September the CBR toughened its stance, with Nabiullina arguing that CBR’s main contribution to the economic development through curbing inflation. Monetary stimuli at this point would contribute to price growth, rather than to closing the output gap, she believes. Nabiullina also said that given than current tendencies are maintained, the likelihood of keeping the rates unchanged at the next CBR’s BoD meeting is high. The next meeting will take place on October 14.

A cut in the rates is still expected by the end of 2013. However, until the annual inflation rate is above the band of the 5%-6% target bold moves by the CBR are unlikely.