Russia: Inflation falls further in February, raising possibility of an earlier interest rate cut
March 7, 2017
In February, consumer prices in Russia rose 0.2% from the previous month, undershooting the 0.6% increase in January and falling short of the 0.3% rise the markets had expected. In a statement, the Federal State Statistics Service (Rosstat) stated that February’s result reflected softer price increases in food items—due to a more abundant supply of local crops—and a decrease in prices of electronics, given their sensitivity to exchange rate fluctuations and the fact the ruble is strengthening.
Inflation declined from 5.0% in January to 4.6% in February, which was the lowest level since June 2012. Russia’s Central Bank has played an important role in bringing down inflation as well as in the stabilization of the Russian ruble. Recently, the monetary authority has softened its tone, given the positive inflation surprises and the RUB appreciation, despite the newly launched FX interventions. Although the balance of growth and inflation risks favors a gradual easing of monetary policy, the Central Bank is likely to stick to its guidance and maintain interest rates at the current level of 10.00% in Q1. However, the current inflation and exchange rate dynamics suggest a cut in the monetary policy rate. As Anatoliy A Shal, Chief Russia Economist at JP Morgan says:
“Although we don’t think that a cut in March is very likely—this would be a bit inconsistent with the very hawkish signal at the February meeting—the probability of this has increased. What looks more likely is that the board will adopt a more dovish rhetoric at the next meeting to signal a cut in April or June. The still elevated household inflation expectations could continue to be used to justify the caution. To gauge whether the pace will be changed to 25bp steps we’ll probably need some more signals, e.g. from the governor after the March meeting. However, even if the CBR switches to 25bp at each meeting from 50bp at every second meeting (as is in our current base case), it is unlikely to significantly change the outlook for the total amount of easing for the year.”
The broad-base nature of the slowdown in inflation suggests that it reflects a sustained decline: annual average inflation fell from 6.7% in January to 6.4% in February.
Author: Ricardo Aceves, Senior Economist