13/5/2012: Russian economy - Inflation & Monetary Policy

Russia’s central bank (CBR) refinance rate was affirmed at 8.00% last week, with the overnight deposit rate at 4%, the minimum auction repo rate at 5.25% and the fixed repo rate at 6.25%. Per Danske Markets, “the CBR stated that it views rates as being acceptable for the coming months as inflation pressures arise in H2 12.”

The following analysis is based on Danske Markets forecasts and my own outlook. IMF latest projections are tabulated below.

Inflationary pressures remain at the core of the CBR concerns as economy is running on-track to hit 4.0-4.3 percent real growth (close but below 4.3% in 2011 and 2010 amidst more adverse global growth conditions in 2012). Core growth drivers are: Private Consumption (expected +4.9-5% yoy), Investment (+8.0-9.0% yoy and run close to 23.6% of GDP, slightly less than 20.7 and 23.2 in 2010 and 2011). Investment grew 6.0% and 5.5% in 2010 and 2011, so 2012 expectation is for acceleration. Exports growth (+7.5-8% yoy) is expected to fall short of imports growth (16.0-16.5%). Exports grew at 10.5 and 21.8 percent annually in 2010 and 2011, while imports expanded 22.1 and 25.4 percent, respectively. With trade surplus expanding at 7.0-7.3% against 8.6% growth in 2011. Current account surplus grew 4.7% in 2010, 5.5% in 2011 and is expected to slow down to 4.8% in 2012.

Unemployment is expected to remain intact of decline at 6.0-6.6% in 2012, close to 6.5% observed in 2011.

These dynamics suggest inflationary pressures not abating in 2012 on demand drivers, even absent robust employment growth, implying lack of easing momentum for CBR. Inflation is expected to come in at 6.3-6.7% in 2012, up on 6.1% in 2011 and down on 6.9% in 2010. On year-end CPI basis, expected inflation for 2012 is around 6.2% according to the IMF and average price increases on CPI basis should be around 4.8%. Furthermore, 2013 Russian economy is expected to experience structural de-acceleration in GDP growth to below 4% with 3.5% projected in real terms, with IMF forecast for 2012 real growth of 4.01% down from 4.3% in 2010 and 2011.

Additional factors strengthening inflationary expectations are delayed introductions of tariffs increases and fuel prices liberalization (revision up).

Meanwhile, owing to tighter monetary policy, consumer prices have posted another record low inflation in April (3.6% yoy) after similar post-Soviet period record of 3.7% yoy in March 2012.