The growth of national definition monetary supply (M2) declined notably to 8.5% y/y in March, according to the data by the Central Bank of Russia (CBR). Last time single-digit y/y growth of the indicator was posted in November 2009. In m/m terms M2 declined by 2.2% m/m (after inching by 1.1% m/m in February and declining by 4% m/m in January 2014). To compare, in March 2013 M2 growth stood at 14.6% y/y, in March 2012 at 21% y/y and in March 2011 at 24% y/y.

In absolute terms, M2 amounted to RUB 29.8tn (USD 828bn), cash in circulation was RUB 6.6tn, and non-cash funds were at RUB 23.2tn as of end of March. Both cash in circulation and non-cash funds declined by 1.4% m/m and 2.4% m/m, respectively.  In y/y terms the indicators’ growth slowed down from 9.1% y/y and 13% y/y in February to 6.9% y/y and 9% y/y in March, respectively.

The CBR throughout 2013 came back to a tougher monetary stance and inflation targeting, after signalling a possible beginning of a government-pushed softer policy cycle in spring. This was reiterated in the beginning of 2014 and strengthened by increased geopolitical inflationary pressures in spring 2014.

In the end of April, the CBR increased the key interest rate by 0.5ppt to 7.5% due to increased inflationary risks. The key interest rate was temporarily increased from 5.5% to 7% in the beginning of March, when RUB dropped on the news of Russia authorising military involvement in Ukraine. The CBR after said it will keep the rate unchanged at least until July, unless inflationary pressures intensify.

The decision to increase the "temporary" rate was unexpected. Analysts surveyed by Reuters expected the rate to remain unchanged at 7%. The CBR commented on the latest decision that the likelihood of not complying with 5% inflation target has increased. Annual inflation that approaches 7% is expected to peak in May and June. Official forecasts were already revised from 4%-5% to 6%. The central bank notes that slowing economic growth is not slowing the growth structurally due to tight labour market and low unemployment, unfavourable demographics, and high capacity utilisation with low labour productivity.

The CBR hopes that upping the key interest rate will allow to curb inflation to 6% by the end of 2014. Next meeting of the BoD of the central bank is scheduled for June 16. Due to RUB weakening consumer price growth in Russia in March amounted to 6.9% y/y and 1% m/m. Inflation accelerated notably from 6.1% y/y seen in January and 6.2% y/y in February. A year ago in March 2013 7% y/y inflation was seen.