Page 46 - RusRPTMay21

As CBR expected, inflation has finally started to slow down, with CPI dropping from 5.8% y/y in March to 5.5% y/y in mid-April.
The main reason for inflation easing has been the base effects in fruits and vegetables, as well as rising inflationary pressures in other sectors.
In non-food goods and services (excluding utilities), pressures have intensified far beyond 4%. As a result, core CPI has risen from 4% y/y to 4.5% y/y.
Higher cost-push pressures from Russia’s rapid economic recovery have run into supply-chain disruptions, which could push costs upwards both locally and globally. The current run rates imply that inflation could end 2021 at 4.4% y/y before easing to 4% in 1H22.
Although the inflation spike appears to be of a non-monetary nature and cannot be dealt with via monetary policy tools, it creates inflationary pressures that affect expectations. Expectations of the 12-month ahead CPI remain high at 10% y/y. These expectations are pushed by certain food categories, such as eggs, meat and poultry, which face regional and global supply-chain disruptions that will likely keep pressures elevated.
With the materialization of risks in mid-April, monetary conditions have started to ease, with OFZ yields reaching their lowest levels since previous decisions, implying a lower geopolitical risk premium.
In addition, MinFin’s decision to cut borrowings this year by 0.8% of GDP should also facilitate better monetary conditions.
Finally, a lower risk premium embedded in the exchange rate should decrease FX pass through pressures. At the same time, any further escalation could affect opportunities to lower the geopolitical risk premium, which is still embedded in the current market pricing. As of today, this still calls for bold action from CBR, with the key rate at more than 6% on a 12-month horizon.
Apart from geopolitical risks, external conditions remain favourable, with oil prices remaining within a range of $65-70/bbl. Despite greater inflation, US benchmark yields have stabilized, although the recovery in growth remains uneven, with the US spurred by an additional stimulus and China’s data pointing to a strong rebound as Europe lags behind due to a third wave of COVID-19.
Russia’s economy has been recovering rapidly since 4Q20. According to Rosstat and proxy economic indicators, GDP growth rebounded from its trough of -7.8% y/y in 2Q20 to -3.5% y/y in 3Q20 and -1.8% y/y in 4Q20, with the GDP proxy pointing to a decline of 2.5% y/y in 2M21. Consumer spending, the main parameter that fell the most last year, had almost fully recovered as of
46 RUSSIA Country Report May 2021 www.intellinews.com