Russia Watch: CPI at the tipping point, the CBR proceeded with MPC tightening

According to Rosstat, the CPI reached 0.66% mom (5.8% yoy) in March. The March figure should be a tipping moment for the annual path and we expect CPI to decelerate to 4.9% by 2021 YE. The CBR already responded with a key rate hike (+25bp), with further tightening on the agenda.

CPI decelerated in March (mom s.a., in pp)

Rosstat, RBI/Raiffeisen Research

In March, the consumer price index (CPI) peaked up to 5.8% yoy (5.7% yoy in February). However, as we expected, the seasonally adjusted figure demonstrated an improvement (0.56% mom vs 0.69% mom in the previous month). The key contribution to the CPI deceleration came from food items (0.57% vs 0.92% mom s.a.) driven by fruit and vegetables prices (-0.10pp to the monthly figure). In the meantime, meat and poultry continued to put upward pressure on CPI (+0.15pp) against the backdrop of surging chicken prices. The consequences of bird flu and feedstuff prices rise resulted in ~18% yoy price growth, also affecting egg prices – ~33% yoy. Such single-item CPI spikes are temporary and are expected to level off in H1 2021. Nevertheless, they will continue to affect year-on-year figures, not allowing the CPI yoy to decline sharply.

According to the CBR, both inflation expectations and observed CPI slightly worsened (to 12.7% by +0.4pp and to 10.1% by +0.2pp, respectively). Interestingly, the poll results differ between social groups with and without savings: only those with savings observed inflationary pressure. Generally, both historically high CPI and inflationary expectations are related to relatively small demand shocks during the health crisis and its subsequent rapid revival backed by extraordinary high fiscal stimulus.

The Central Bank of Russia also changed its view on inflation dynamics. According to the CBR’s governor E. Nabiullina, CPI would return to the target level (4.0%) only by H2 2022, which is in line with our updated forecast. Being concerned by increased inflationary risks, the CBR started the monetary policy tightening at its last MPC meeting with a 25bp hike (the key rate is currently at 4.50%). We expect the key rate to approach the lower end of the neutral range (5.00%) already in Q2 2021 given the hawkish stance of the CBR. The increasing key rate, a fade out of food product spikes and high base effect of 2020 will contribute to a slow CPI deceleration. We expect it to decline to 4.9% by YE2021 and 4.0% in Q2 2022.