Page 26 - RusRPTJul19

4.2 Inflation
After rising from around 4% at the end of 2018 to peak at 5.27% in March, following a 2pp hike in VAT rates amongst other factors, inflation has begun to fall again faster than expected and was 5.13% in May.
The soft inflation pressure lead the Central Bank of Russia (CBR) to cut rates by 25 bps to 7.50% in June, with the CBR citing the ongoing deceleration in inflation and lower short-term risks compared to March.
The CBR believes the inflation slowdown is due mostly to weak consumer demand and "temporary" factors, such as a stronger ruble and slow growth of gasoline prices YTD.
According to CBR governor Elvira Nabiullina, the CBR assumes the VAT hike is contributing around 0.4 pp to inflation, while core inflation is near 4%. Based on these estimates, the CBR revised its inflation forecast downward from 4.7- 5.2% to 4.5-5.0%.
The CBR said that the next cut would come at one of the upcoming meetings, which Nabiullina clarified to mean one of the next three. We think the next cut will come at either the July or September meeting, but more likely September.
Nabiullina said the bank could cut the key rate to a neutral level, which is still considered 6-7%, by the end of the year if inflation comes in line with current expectations.
Sberbank CIB view is that inflation will decelerate to 4.5% by the end of the year, which is in the middle of the CBR's range.
26 RUSSIA Country Report July 2019 www.intellinews.com