Page 29 - RusRPTDec18

4.2.1 CPI dynamics
Russia's Consumer Price Inflation (CPI) continued to accelerate, registering 3.5% year-on-year in October 2018, up from 3.4% in September, versus 3.1% seen in August and 2.5% in July, but still below the central bank's target rate of 4%, according to a report by Rosstat statistics agency.
Inflation reading was lower than the consensus expectation of 3.6% y/y by Reuters economist survey and is largely seen as still in check with the expectations of the Central Bank of Russia (CBR). Price pressures from main commodities and gasoline is in focus, as the CBR signalled it is ready to further tighten the monetary policy should price growth spin out of control.
"Overall, seasonally adjusted price growth, according to our estimates, was in line with the CBR’s inflation target," VTB Capital commented on November 7, adding that "combined with the retreat in households’ inflation expectations to 9.3%, we believe that the likelihood of the key rate remaining flat through 1H19 has increased."
Analysts surveyed by Reuters believe that the CBR will maintain the key rate at 7.5% at the next board meeting in December, and will maintain the rate throughout 2019 to start cutting it again in 2020.
Previously in September as inflation broke out of CBR's forecast of 2.8-3%, while sanction pressure provoked volatility and pressure on Russian assets, the Central Bank of Russia (CBR) surprised analysts by front-loading the monetary policy rate with preventive 25bp hike to 7.5%.
The CBR has surprised the market not only by increasing the rate, but also with considerably worsening the inflation forecast, now seeing the CPI in 2018 at 3.8-4.2% (up from 3.5-4%), and for 2019 to 5-5.5% (up by 1pp from previous 4-4.5%).
The regulator then maintained the rate flat in October commenting that actions taken in September have stabilised the domestic financial market and calmed ruble volatility. However, the CBR in the accompanying press-release warned that "inflationary risks remain elevated, especially in the short-term" and that "uncertainty remains concerning further developments of external conditions."
A higher value added tax will add 1 percentage point to Russia’s inflation rate next year and will have a short-term adverse impact on economic growth, Russian central bank governor Elvira Nabiullina said on Thursday. Nabiullina also said that the central bank’s current key rate was close to neutral level.
4.2.2 PPI dynamics
The noticeable development with PPI has been the sharp rise since April, largely driven by the rising oil prices. PPI peaked at 16.9% in October, the last data set, and is likely to remain elevated for the rest of the year, despite the recent fall in oil prices to about $63.
Ruble-denominated oil prices started to add more visibly in April, with +45.4% y/y, while in June they surged +74.5% y/y. Given that gasoline makes up 4% of the consumer basket, and taking into account the retail price structure, bankers estimated the total effect on consumer inflation in May at about +0.5pp.
However, the basket structures of CPI and PPI are completely different. While, for CPI, Rosstat applies the consumption structure, in the case of PPI, it uses the amount of goods produced. Given this, in a sense the PPI basket is closer to that for IP, with the weight of oil-linked industries in the basket close to 28%.
29 RUSSIA Country Report December 2018 www.intellinews.com