Russian inflation in 2018 at 4.3% over the CBR’s target, but rate hike unlikely

Russian inflation in 2018 at 4.3% over the CBR’s target, but rate hike unlikely
Russian inflation in 2018 at 4.3% over the CBR’s target and could hit 5.5% in 2019
By bne IntelliNews January 10, 2019

Russia finished 2018 with inflation of 4.3% in excess of the Central Bank of Russia’s (CBR’s) 4% target rate, Rosstat reported on January 10. The central bank is unlikely to react to the price rises until its meeting in March.  

The result will be a disappointment for the CBR after inflation was at a record low for most of the year, rising only in the last two months of the year on the back of increasing food prices, but it was not unexpected.

The latest number was the result of a very minor upward revision from 4.2% to 4.3% y/y, with the 0.8% m/m figure reiterated.

The figure was higher than the most recent forecast by the Russian central bank, which expected inflation to rise to 3.9-4.2% by the end of last year and 5.0-5.5% this year.

The acceleration in the annual rate vs November's 3.8% y/y was the result of food price acceleration from 3.5% to 4.7% y/y, while non-food inflation slowed from 4.2% to 4.1% y/y, reflecting a freeze in gasoline prices and weakening consumer demand.

Analysts don't believe that the higher than expected inflation rate will lead the CBR to hike rates again at the upcoming monetary policy meeting on February 8. The CBR hiked rates three times last year and the last surprising 25 basis point rate hike to 7.75% in December 2018 was presented as pre-emptive, which was intended to lower the need to hike again in February.

Prices also got a boost in the run-up to the end of the year as a VAT increase from 18% to 20% came into effect at the start of January and led many to make big ticket purchases at the end of 2018 to avoid cost increases. That is a temporary effect that should wear off now.

“The known unknowns for the CBR regarding the CPI trend at this point seem to be related to the scope of inflationary response to the VAT and excise hike effective 1 January both in terms of current CPI and inflationary expectations by households and corporates, the sustainability of the gasoline price freeze beyond March, as well as the prospects of further sanction pressure on Russia,” ING said in a note.

“We do not expect any of those to be clarified before 23 March, when a core CBR meeting (accompanied by the governor's statement and forecast updates) takes place. The latter could lead to another 25 basis point hike if by then it becomes apparent that the CBR is likely to approach or exceed the 6% ceiling outlined earlier by the CBR and/or inflationary expectations by households and corporates continue to rise,” ING added.

Another factor driving inflation is the high expectation of the population of coming price rises, which was running at an expectation of 9% inflation in 2019, on the back of nerves about more US sanctions and a further weakening of the ruble. The ruble lost 21% of its value in 2018, but that was as much to do with the dollar strengthening as the ruble falling.

In 2020, inflation will be 3.8%, and in 2021-2024 it will return to the target value of 4%, according to a report from Russian Chamber of Accounts.

Keeping inflation near 4% in the next three years is realistic, although in 2019 there is a significant risk of exceeding the target level, according to the report.

"According to the monetary policy, the weakening of the ruble and the forthcoming growth of the value-added tax led to increasing inflation expectations and demanded an upward revision of the inflation forecast," the report said. "In this situation, consolidating the growth rate of consumer prices around 4% seems realistic for a three-year period considered in the monetary policy. However, in 2019 these reasons might bring significant risk of exceeding the target inflation level," the Accounts Chamber said.