Russian inflation to slow to 8% in 2016 on stabilizing oil prices

At the start of 2016, projections were made for Russia’s inflation to reach 10.7% in 2016, said Commerzbank. The forecast was made on the ruble exchange rate weakening with subsequent pass-through effects on CPI, noted Commerzbank.

However, the oil price stabilization, along with lower CPI figures, which were mainly due to base effects, indicates that Russia’s inflation is expected to slow to 8% in 2016, added Commerzbank. Meanwhile, inflation is expected to be slightly lower at 7% in 2017, according to Commerzbank.

The altered projection of inflation will provide the Bank of Russia enough room to cut interest rates. The central bank has already shown a preference for lower interest rates. But the CBR is expected to avoid lower interest rates until the fourth quarter of 2016, though there is a possibility of cutting rates earlier, added Commerzbank. In fact, before beginning a rate cutting cycle, the central bank intends to see a continuous lower CPI prints.

“That being the case we think there is scope for rates to fall by around 50 bps over the remainder of this year, bringing the base rate to 10.5% by year-end”, said Commerzbank.

The Bank of Russia is likely to lower rates aggressively in 2017 as inflation decelerates further, noted Commerzbank.