Russia: Inflation reaches lowest level in over two years in July
August 4, 2016
Consumer prices rose 0.5% in July over the previous month, which came in above the 0.4% increase registered in June. According to the Statistical Institute, the monthly increase was the result of higher prices for services, particularly services related to housing and utilities.
Inflation began to decline rapidly toward the end of 2015 and stabilized at 7.3% between March and May of this year before increasing slightly to 7.5% in June. However, this uptick in inflation proved to be short-lived as inflation decelerated to 7.2% in July, which was below the 7.4% rise that the markets had expected and represented the lowest rate since March 2014. That said, inflation remains well above the Central Bank’s target of 4.0%.
The Central Bank kept the monetary policy rate unchanged in July at 10.50%—the second highest in the world in real terms—in order to cause inflation to fall in the coming months and meet its target by the end of next year, despite weak economic conditions. Some analysts suggest that July’s deceleration in inflation bodes well for an interest rate cut at the Central Bank’s next meeting scheduled for 16 September. William Jackson, Senior Emerging Markets Economist at Capital Economics, stated that, "the larger-than-expected fall in Russian inflation suggests the central bank will resume its easing cycle at the next MPC meeting.” Jackson expects inflation to slow further in August and sees the Bank making a 50-basis-point rate cut at the September meeting. Russia’s Central Bank has only cut the one-week repo rate once this year and left it unchanged at 10.5% at its last meeting in July.
Author: Luis Lopez Vivas, Economist