The business cycle

Russia: Inflation pick up does not change the case for lower interest rates

By August 31, 2018 September 4th, 2018 No Comments

Given the trend in the weekly CPI releases, inflation is likely to pick up above 3% YoY in August, from 2.5% yoy in July, remaining below the CBR’s 4% inflation target notwithstanding the depreciation of the currency earlier in the year. The small jump in August is largely due to unfavourable base effects rather than a change of conditions. Economic activity continues to expand around 1.5% on average – with the latest data a bit more optimistic, but remaining within the range of the last few quarters. The CBR has entered a pause for monetary policy after the renewed sanctions threats from the US. We think this pause will not be much longer than a couple of quarters, since even if RUB weakens significantly in the coming six months as a result of the new sanctions, the only effective way Russia will have to stabilise the country is to lower interest rates and maintain a modest fiscal stance (not as expansionary as recently announced, but not too tight despite the potential drop in activity).