Inflation in Russia is declining, but RUB depreciation remains a concern

Russian inflation continued to decelerate in May, rising just 0.4% and 15.8% y/y, slightly below forecasts. On an incremental basis, inflation was up just 6.5% annualised during April and May. Food and services inflation rates are decelerating while non-food goods inflation is still rising.

The main factor pulling inflation lower was RUB appreciation of 28%. CBR's decision to begin accumulating reserves again in mid-May led to a 10% depreciation of the RUB. In the past, substantial RUB depreciation has rapidly led to inflation. If the weakening RUB trend continues, inflation will likely start to increase again. It is possible that the CBR will reverse policy and stop purchasing FX if it becomes concerned about the inflationary impact of RUB depreciation.

"The CBR has a difficult rate decision in its upcoming meeting in mid-June. Previously we predicted it would cut by an additional 100bp to 11.5%. However, in our view, this is dependent on RUB developments in the next 11 days. If the RUB continues to depreciate, the CBR will have to reconsider its monetary policy stance. We expect the CBR initially to discontinue FX purchases. If the RUB still appears vulnerable, it may have to forego rate cuts until financial markets stabilise." said Barclays in a report