- The vast majority of analysts expect a rate cut Friday
- CPI isn't as benign as it seems at first glance
- Central bank governor has waxed hawkishly of late
Headline inflation may be flat but the price of food staples keeps rising. Pic: iStock
By Nadia Kazakova
Looking at the consensus it would appear that a 50 basis points rate cut on September 16 is all but a done deal. Some 19 out of 22 analysts polled
by rbc.ru and 26 out of 29 polled
by Bloomberg expect the central bank of Russia to cut the key rate from 10.5% to 10% at its next board meeting.
Table: Analysts' consensus forecast for key rate decision
Mind you, in mid July, the analysts' consensus was overwhelmingly for no rate cuts before the Russian parliamentary elections on September 18.
While the case for a rate cut might be quite solid, there is also an argument for a no cut on September 16. If the key rate remains unchanged at 10.5% on September 16, it might be a net positive for the rouble.
There seems to be two main reasons for a rate cut. First, there has been no increase in consumer prices in August (compared to July) and so far in September (on a weekly basis). The other reason is the strength of the rouble, which could be partially down to high interest rates (but also to much reduced volatility of the Russian currency).
Monthly inflation in Russia was 0% in August while 12-month rolling inflation was down to 6.9% year-on-year. After a few month of the consumer price index sticking above 7% y/y, the annual inflation rate started to decline again.
Table. Monthly and annual consumer price index (CPI), % m/m and % y/y
Source: www.gks.ru, quote.rbc.ru
The apparent inflation freeze, however, might be deceptive. The breakdown of CPI both in August and September clearly shows that food prices excluding fruit and vegetables continue to rise. In August, there were up 0.4% month-on-month, and there have been steady week-on-week increase in prices for staples such as eggs (up 0.9% w/w as of September 12), rye bread (+0.3% w/w) and milk (+0.2% w/w).
Strength in the rouble could also prove transitory if the global sentiment towards higher yielding currencies start to sour. The central bank of Russia might remain cautious and keep the key rate unchanged until after the Fed meeting on September 20-21.
There is also an argument for keeping things steady until after the parliamentary elections on September 18. While the pro-president United Russia party is likely to retain its overwhelming majority in the new Duma, the elections might bring a few surprises and, most likely, a more representative parliament.
Half of the seats (450 out of 900) would go to individual (single mandate) candidates rather than to major parties. It might feel like a bit of an experiment for the ruling elite and the much lauded macro stability is probably required as a background. It would mean higher rates for longer than would be otherwise.
Finally, the central bank governor Elvira Nabiullina made quite hawkish comments
as recently as September 9 at a banking conference. She noted that stable and positive interest rates would safeguard household deposits against inflation, support high level of savings which then could be transformed into investments. The notion might be slightly optimistic (sound monetary conditions do not equal a good investment climate), but it does reflect the governor's position.
At the very least, it means that the risk of no rate cut decision is higher than the consensus currently assumes.
– Edited by Clare MacCarthy
Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector