National definition monetary supply (M2) posted growth of 17.1% y/y in August flat as compared to 17%in July, according to the data by the Central Bank of Russia (CBR). In Q2/13 average growth of the indicator was 15.3% y/y accelerating after 14% y/y average growth of M2 seen in Q1/13. This followed a stable deceleration of indicator’s growth throughout 2012 (from 22.3% y/y in January 2012 to 19% in August to 11.9% y/y in December 2012).

To compare, 16.6% y/y M2 growth was posted in August 2012, 19.4% y/y in August 2011, and 32.8% y/y in August 2010.

In m/m termsб M2 increased by 0.2% m/m in August after 0.8% m/m in July and 1.5% m/m in June. In absolute terms, M2 amounted to RUB 28.779tn (USD 907bn), cash in circulation was RUB 6.51tn, and non-cash funds were at RUB 22.27tn as of end of August. Cash in circulation gained 0.5% m/m in August. Non-cash funds went up by 0.1% m/m and 20% y/y accounting for 88% of M2’s y/y gain.

The CBR that expected the growth of monetary supply to decline below 20% by the end of 2012, maintained that declining money supply growth rates are going to help curbing inflationary pressures in the beginning of 2013. However, in March and April’s monthly policy releases the central bank signaled the beginning of a government-pushed softer policy cycle. Since then CB cut the rates on long-term operations, recognized the risks of economic slowdown, and introduced new longer-term liquidity instruments in addition to REPO and collateral auctions.

In June and July the anticipated cut of the refinancing rate (8.25%) and other main rates (5.5% REPO auction rate) was postponed only due to inflation peaking at 7.2% and 7.4% in May and June, respectively.

However, in September’s policy releases, the CBR seemed to be coming back to a tougher monetary stance. The refinancing rate again remained unchanged even after inflation moderated to 6.5% in August and July. Head of the CBR Elvira Nabiullina argued that she sees CBR’s main contribution to the economic development through curbing inflation. Monetary stimulus at this point would contribute to price growth, rather than to closing the output gap, she believes.

Nabiullina also hinted that in October the main rates are also likely to remain unchanged. The CBR is expected to lower the rates as the inflation enters 5%-6% target for this year. Assistance from the government with inflation-curbing moves from is also likely to be required by the CBR for any bold monetary policy moves.

The CBR already revised its inflation target for 2014 from previously set 4.5% to 5% because the government backtracked on its 2014 tariff freeze and decided to index the utilities tariffs for households.