Russia Watch: CPI entered “far far away” territory — hike in October expected

The CPI jumped to 7.4% yoy in September (by 0.7pp up from the August figure). Moreover, the monthly growth rate adjusted for seasonality (0.85% mom sa) even exceeded the level of the first pandemic month of 2020. Thus, we expect another (last) key rate hike to 7% on October 22.

Inflation and key rate forecast

Rosstat, CBR, RBI/Raiffeisen Research

The recent spike has already triggered participants of the key rate OIS market to reprice their expectations on the 6M horizon upwards by 50bp to 8% after anchoring near 7.5% for approximately a month. However, in our view, their reaction could be excessive and shift to the downward trend in inflation is a matter of a month. The most distorting impact came from fruits and vegetables (6.9% mom sa) amid a weak harvest campaign — composing 1/3 of the monthly figure (0.27pp). This is one of the most volatile CPI components and the growth could soon turn to a drop as happened in the “cold” summer 2017, when the peak monthly pace (8.8% mom sa) was followed by deflation.

A certain silver lining came from non-food items, where the CPI slowed down from ~0.8% mom sa in the 4 preceding months to 0.5% mom sa. This was partly explained by monthly fuel inflation turning to zero (-0.4pp impact in comparison to previous month), but also could be related to the demand side cooling down due to hikes already imposed by the Central Bank of Russia (CBR). However, we anticipate, that the impact of the tightening cycle has not been fully presented in statistics. Moreover, the expected bank lending channel stabilisation amid the further tightening of macroprudential measures and fiscal policy normalisation starting from 2022 should contribute to future inflation leveling off.

Nevertheless, taking into account the unprecedentedly large social expenditures of August-September, we revise the inflation figures forecast upwards (6.8% yoy in 2021 YE), maintaining the trajectory — reversal in November 2021 and leveling off close to the CBR target at the end of 2022. The CBR is also expected to revise the midterm forecast (including CPI ranges), which should not change the pace of monetary policy. In his recent October 6 interview, K. Tremasov (head of the monetary policy department of the CBR) called its current state “a fine-tuning”, which explains the recent 25bp hike at the September meeting and hints at the same move on October 22. In turn, we revise our key rate forecast for the 2021YE by 25bp (to 7%).