Russia Watch: February CPI at peak value, CBR seen to keep rates stable in 2021
In February, CPI peaked at 5.7% yoy. We expect the CPI upward trend to turn around from March and slow down to 4.0% yoy by year end 2021. Although such high inflation creates risks of earlier than anticipated key rate hikes, we expect it to remain unchanged till year end 2021.
Consumer price dynamics reach pace last seen in 2016 (% yoy)
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According to Rosstat, the consumer price index (CPI) rose to 5.7% yoy in February (0.8% mom), the highest level seen since November 2016. It exceeded the estimates based on the weekly data (5.6%), even despite strong weekly pace (+0.2% per week almost every week during the last 3 months). In our understanding, extraordinary CPI level is mainly driven by idiosyncratic factors affecting food products prices, while the key demand components increase only moderately. The composite CPI for non-food and services stood at 4.5% yoy, while food inflation accelerated to 7.7% yoy (4.1% and 7.0% in January, respectively). Egg prices skyrocketed to 31% yoy, hitting the record high level amid the rise in feedstuff prices and bird flu outbursts across Europe and the South of Russia. At the same time, such price surges can be stabilized after being spotted by the government. For example, prices for sugar (-0.8% mom) and sunflower oil (+0.2% mom) are no longer demonstrating accelerated dynamics.
Meanwhile, inflation expectations demonstrate an improvement. They declined to 9.9% yoy by -0.6pp, for the second month in a row. The observed CPI leveled off in February (to 12.3% yoy by -0.5pp) after a long period of growth. As per the poll results, the key positive factor is the observed price stabilization for aforementioned products.
Even though the expected downward trend has not started yet, we expect CPI to pass the peak in yoy terms in March mainly due to stabilization of food products prices. A high base of March-April 2020 (due to the first wave of COVID-19) is likely to contribute to the moderation as well. Going forward, we expect CPI to gradually slow down to 4.0% by year end 2021 which is in line with the CBR’s official forecast (3.7% — 4.2%).
Thus, in the base case scenario no monetary policy tightening is expected (4.25% until 2021 YE) backed by CPI recovery. At the same time, we acknowledge that the risks of earlier than anticipated key rate hike have increased given such price developments.
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