CPI inflation in Russia in July moderated to 6.5% y/y and accelerated to 0.8% in m/m terms, in line with the expectations of officials and analysts. Previously in May, annual monthly inflation hit 21-month high at 7.4% y/y. Central Bank of Russia (CBR) expects that 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 and July the high consumer price growth moderated expectedly as effect of last year’s drought and poor harvest on high food prices wears off. Food prices froze in m/m terms at 0.0% m/m in July and moderated to 6.8% y/y from 8% y/y in June and 9.2% y/y in May. Good harvest is expected this summer and food inflation is likely to decline further in the coming month.

While food prices continued to moderate services’ price growth accelerated to 3.1% m/m and 8.4% y/y in July (0.6% m/m and 8.1% y/y in June). This was mostly due to 7% m/m hike in prices of utilities and housing.

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

New head of the CBR Elvira Nabiullina told the press on the decision that the central bank will only cut the rates once a consistent decline in prices is confirmed.  It is not certain that the CBR will cut the refinancing rate by one notch of 25bps already in July, but a cut in main interest rates is likely during Q3/13.