Russia’s headline inflation likely to slow further in March on base effects, but likely to accelerate in Q2

Russia's inflation in February slowed sharply to 8.1% y/y from January's 9.8% y/y. Inflation decelerated mostly due to base effects as monthly inflation was 2.2% in February 2015 due to pass-through from a severe depreciation of the Russian ruble. On monthly basis, inflation slowed to 0.6% in February 2016 from 1% in January 2016. The rebound in inflation was mainly due to food inflation that slowed to 6.4% y/y, much below headline inflation. Meanwhile, services inflation decelerated to 8.5% y/y, whereas goods inflation, excluding food, accelerated to 9.5% y/y.

Headline inflation is expected to decelerate further in March with the help of base effects. However, base effects will become less favorable from April and is expected to accelerate inflation in Q2 2016. Moreover, excise of 5% on oil prices is expected to add 0.2% to inflation in April. The Russian ruble's movement continues to be the most significant variable.  Recent appreciation in the currency appears to have helped decelerate monthly inflation.

Meanwhile, the Bank of Russia has kept its interest rate unchanged at 11% since July 2015. A continuation of lowering cycle appears imminent as inflation has slowed so much. But guidance after the January meeting suggested that the central bank is worried regarding global inflation trends and is not prepared to ease policy in the near term. The Bank of Russia had stated that it is worried that inflation will rise in Q2.

"We forecast the CBR beginning rate cuts in Q3 and cutting in 50bp increments for a cumulative 200bp of cuts", says Barclays.