| JRL Home | JRL Simple/Mobile | RSS | Newswire | Archives | JRL Newsletter | Support | About
Old Saint Basil's Cathedral in MoscowJohnson's Russia List title and scenes of Saint Petersburg
Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson

ANALYSIS: Russian Inflation Could Soar to 10% in H1, CB to Hike Rates

Line Graph, Coins, CashMOSCOW. Jan 13 (Interfax) - Inflation in Russia could accelerate to 10% in annual terms during H1 2011 before slowing, and the Central Bank is likely to put its refinancing and other rates up as early as the first quarter, analysts at investment banks and companies told Interfax.

Faster inflation

The analysts hardly have any doubt that inflation will speed up in the comng months. Some say it will hit 10% in annual terms by the spring, while others think closer to the summer. Consumer prices will grow for a variety of reasons.

Vladimir Osakovsky, chief economist at UniCredit Securities, said monetary base expansion would do most to fuel inflation. The base is already very high and will continue to grow, he said.

Troika Dialog (RTS: TROY) analyst Anton Struchenevsky agreed. "The problems with the harvest were the trigger, and inflation jumped because of it. But this was also nurtured a huge overhang in the form of ruble liquidity, which was printed in H1 2010 when the Central Bank, in my view mistakenly, tried to manipulate the exchange rate and accumulated gold and forex reserves. Money supply grew almost 30% in the year, and it was hardly surprising that we got 8.8% inflation. That factor has now worn off, and budgetary factors came into play in December," the analyst said.

Vladimir Tikhomirov, chief economist at Otkritie, said higher inflation has been fuelled by a low base in the later part of 2009 and H1 2010, when price growth slowed substantially both in monthly and annual terms as consumer demand shrank. This process will be reversed in H2 2011 because monthly inflation was back to normal, pre-crisis levels in H2 2010. This ought to slow inflation to 9% by the end of the year.

But this is the best-case scenario: Tikhomirov said Russia could face 12%-15% inflation in 2011 unless the situation with food and commodity prices on the world market, which have been growing robustly since last summer, improves. Food accounts for around 40% of inflation in Russia.

VTB Capital chief economist Alexei Moiseyev agreed that farm produce prices would play their part, but also said factors like year-end budget spending, natural monopoly tariff growth and traditional price growth in non-regulated sectors at the start of the year would fuel inflation.


Inflation might start to slow in Q2 or H2 2011.

Troika Dialog's Struchenevsky said the slowdown could be quite substantial if budget spending goes as planned. Urals crude is trading at more than $90 a barrel, or above the $75 that the government budgeted for in 2011, so budget revenue is likely to be above target. The budget could be in surplus in Q1 2011 thanks to higher revenue and lower spending as is customary for the beginning of a year due to the uneven nature of budget spending. Surplus liquidity will be sterilized and money market rates will rise, Struchenevsky said.

"The budget will be the main inflationary factor. Essentially what the Central Bank does is secondary in nature, and I wouldn't expect any abrupt actions on its part," he said.

There is a chance that inflation will slow in H2 2011 and that inflation will be 7.5% in the year if oil prices and consequently budget revenue stay high, and spending plans are not exceeded.

But there's also the danger that the state will spend the extra oil revenue because this is a pre-election year. VTB Capital's Moiseyev said spending like this usually went on social projects rather than modernization and investment, and this fuels inflation.

Moiseyev said high oil prices and additional revenue were the main inflationary risks. If those risks materialize, the Central Bank will have to put rates up aggressively in H2 2011, and if not, an increase of 50 basis points in Q1 2011 might be enough. The analyst said he thought inflation would be 8.5% in the year.

"Alexei Kudrin (the Russian finance minister) is giving clear signals that spending growth must come to an end, otherwise this will destabilize the situation in the economy," Troika's Struchenevsky said.

UniCredit's Osakovsky said inflation might slow by the end of the year but might still be over 8% in the year as a whole. He said the Central Bank might put rates up 150 bp in H1 2011.

Otkritie's Tikhomirov said the Central Bank might bring its refi rate up to the same level as inflation if the government urges it to do more to combat inflation. If the CB does not come under that sort of pressure, then it will be fairly conservative with rate increases.

"Our expectation is that the rate will reach 8.75% by the middle of the year, that is below our forecast inflation by virtue of its non-monetary nature. Putting rates up is not likely to slow inflation down to a great extent, and will only have a negative impact on the economy because the cost of borrowing will go up," Tikhomirov said.

He said the Central Bank is unlikely to put rates up in January because this is not a typical month. But it might put rates up at the end of February if weekly inflationary trends that month are not much better than for January.

But VTB Capital's Moiseyev said the Central Bank might put rates up at the end of January if weekly inflation is 0.4% this month.

Troika Dialog's Struchenevsky said the Central Bank could put the refi rate up 25 bp, but that it could also opt to do what it did in December, when it kept its key rates on hold but put deposit rates up.

"The CB might react demonstratively, but not radically. It wouldn't be right to put rates up if the CB thought inflation was a temporary budget-related phenomenon, because rates would have to come down automatically when inflation slows, and that would encourage carry trade," Struchenevsky said.

The Federal State Statistics Service (Rosstat) said inflation was 8.8% in 2010. The CB raised deposit rates a quarter of a percentage point as of December 27, while leaving the refinancing rate at 7.75% per annum and lending rates on hold. This was the seventh time in succession that the CB decided to leave refinancing and credit rates on hold. The bank last lowered these rates on June 1, 2010, by a quarter of a percent. The bank had lowered the rates on 14 occasions since April 2009.


Keyword Tags:

Russia, Economy, Business, Investment, Trade - Russia News - Russia - Johnson's Russia List

Bookmark and Share - Back to the Top -        


Bookmark and Share

- Back to the Top -        

  Follow Johnson's Russia List on Twitter Tweet