Russian key interest rate cut unlikely as inflation grows in August

Russian key interest rate cut unlikely as inflation grows in August
Inflation-minded central bank waits to cut the rate
By bne IntelliNews August 26, 2016

Russia's weekly inflation in Russia returned to 0.1% growth on the week ending August 22, clouding hopes that previous month-on-month consumer price deflation will prompt the Central Bank of Russia (CBR) to cut the key interest rate at its September 16 board meeting.

The uptick puts the month-to-date consumer price growth in the three weeks of August at 0, according to data released by the Rosstat state statistics office, drawing pessimistic appraisals from analysts.

"We view this [0% m/m inflation] as Negative news, reducing the likelihood of deflation in August," Alfa Bank chief economist Natalia Orlova said in a note to clients on August 25.

The bank estimates that zero price growth for the full month would put annual inflation in August at 6.8% y/y, which would not be sufficient to allow the CBR to cut the policy rate. As inflation fell at the end of July, analysts forecasted that a compounded deflationary trend in August would strongly increase the chances of a rate cut in September.

After remaining stuck at 7.4% for several months, consumer price inflation in Russia in July 2016 declined to 7.2% y/y from 7.5% y/y in June, well down on a peak of 12.9% in December and beating both official and consensus analyst expectations.

Gazprombank believes that even the 6.8% y/y forecast for August could turn out to be overly optimistic, as "rising inflationary trend is gaining momentum for a wide range of items".

The bank concludes that previously seen weekly weekly deflation is not likely to repeat itself this month, but still remains "hopeful that the CBR will lower its key rate by 50 bps at the September meeting".

Additional factors that influenced inflation forecasts in Russia in recent weeks are inflationary consequences of the government's decision to postpone pension indexation to January 2017, and the US Fed's rate policy in the coming weeks not becoming more hawkish.

Inflation became one of the most watched macro indicators in Russia since the CBR under  governor Elvira Nabiullina free-floated the ruble and switched to strict inflation targeting, seeing low inflation as the prerequisite for revival of investment activity and development of the financial markets.

Although CBR officials have said they want to cut rates to encourage a return to economic growth, the regulator made it clear that it will not do this at the cost of rising inflation.

The central bank decided not to lower the key interest rate from 10.5% at its policy meeting on July 29 despite an economic contraction of 0.9% over the first half of 2016 y/y.