Indexation of tariffs has made the CBR change its tune

Except for the materialisation of tariff indexation, nothing has changed in terms of Russia's internal and external risks. The backdrop in the run-up to the 31 July CBR meeting is different from that observed before the June meeting.

Tariff indexation was scheduled to begin on 1 July and covers a broad set of services provided by natural monopolies to both private and wholesale consumers. Although indexation is a regular event and its size is announced in advance, in 2015 it was fine-tuned once again to take into account the freeze on tariffs for selective services in 2014 and the exceptionally high inflation of the previous year.

"According to the CBR's comments, indexation could trigger some uncertainty within the local price-setting framework and unwind inflation expectations. So far, the indexation of tariffs has become one of reasons why the CBR is likely to tighten it forward-looking rhetoric", says Societe Generale. 

Nevertheless, it may result only in a substantial gearing down of policy easing rather than bringing it to a halt.