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Russia inflation accelerated in August to 15.8% y/y from 15.6% in July, above forecast and the consensus. This represents an important momentum change . Inflation had previously been on a downward trend. It peaked in March at nearly 17%, a few months after RUB depreciation had peaked. It then declined for three months following RUB appreciation. With utility price increases in July and RUB depreciation since May, inflation has risen for two months running. Further RUB depreciation is likely to push inflation still higher. However, beginning in October favourable base effects set in, helping to push y/y inflation lower.
Food inflation had been the leading sector, pushing it higher earlier this year and lower in Q2 . In July, higher services inflation (+1.3% m/m) and other goods inflation (+0.8% m/m) offset seasonal food declines (-0.7%). Fruits and vegetables prices declined in line with seasonal patterns (-9.8% m/m), while other foods inflation prices increased (+0.5% m/m).
"Overall, the pattern of inflation suggests that RUB depreciation is putting upward pressure on prices. The RUB will depend upon trends in oil prices and the posture of monetary policy. We predict that the Bank of Russia (CBR) will keep its key rate on hold at 11% next week. The higher than expected August inflation supports a more cautious stance. We still forecast a reduction in inflation in Q4 towards 12% y/y, although there are upside risks to our forecast depending on oil prices and the RUB", says Barclays.
The market has largely priced out the potential for rate cuts from the CBR. The implied forwards based on the RUB OIS curve after accounting for the basis between 3m MOSPRIME and the policy rate (which is currently at 86bp) are in. A pause next week by the CBR is unlikely to ease pressure on the currency, especially as the recovery in oil prices appears to have lost steam. Indeed, comments by a Kremlin aide that Russia intends to build FX reserves on a move in the USDRUB towards 60 puts a potential floor on the RUB.
" Additionally, if the CBR resumes cutting rates - likely bringing the key policy rate to 10% by end-2015 - we expect a move towards 73.00 by end year", added Barclays.
