Balancing inflation and the rouble
The move by Russia`s central bank to lift the refinancing rate at its last meeting brought economic focus back to inflation, with crude and commodity prices, the rouble, and the economic recovery all factors to be balanced in the response.
Inflation took off in January, with the surge in crude prices and commodities generally leading to fears it could go higher. Vladimir Tikhomirov, Chief economist at Otkritie says the full inflationary impact of the recent surge in oil prices has yet to be felt.
"The current surge in oil prices will gradually worsen Russian inflation, in fact oil prices is not so far a major issue for the inflation process. When we see increase in oil prices it leads to hikes in fuel prices and the chain is further obvious for Russia meaning that inevitably food prices start rising. Taking into consideration that food products account for 38% of consumer basket it became apparent that consumer sentiments will deteriorate. Apart from oil prices, dwindling of harvest and continuous increase of tariffs amalgamate into a serious blast of inflation."
Veles Capital analyst, Ivan Manaenko, believes that after the rebound in food prices during 2H 2010 it has been the recent surge in crude prices, reflecting social instability in the Middle East, which has forced the central bank to act.
"The Central Bank`s reactions to soaring oil prices we have seen already in February when the Central Bank has changed its tactic from smooth well signaled rate increases to a more aggressive stance. Assuming speculative oil price maximums and government policy commitment to limiting price increases the inflationary impact will be limited. I think, that the Central Bank may raise rates by 0.25-0.5 pp in the first half 2011."
UniCredit Chief Economist, Vladimir Osakovsky believes the Central Bank will be pushed into stronger action, tipping a 1% increase in the refinancing rate during the first half of 2011, on the back of food price hikes.
"Moreover, food prices continued to post robust gains, partly supported by strong seasonality in fruits and vegetables, but most other non-seasonal items also posted robust price growth. Therefore, we continue to believe that inflationary pressures are likely to remain strong in the coming months, as the impact of the administrative correction in fuel prices is set to fade in the near future. We also reiterate our expectations of continued monetary tightening by the CB in response to such rising inflationary pressures, and keep our forecast of cumulative 100bp in rate hikes in first half 2011."
Otrkitie`s Tikhomirov sees inflationary pressure subsiding during 2H 2011, but only if oil prices stabilize and food price inflation, internationally and domestically, doesn`t break out more than it has. He says that the rebound in Russian inflation created an environment where the Central bank was forced to act.
"The Central Bank`s challenge is far more complicated as a regulatory body with the bulk of triggers. It is far more concerned on lowering money supply by increasing rates and not only refinancing rates, the core measures are rising reserves rates and other hedging rates that secure and slash the volume of free liquidity on the market.
In essence, the Central Bank`s announcement and actions on the refinancing rate and continued increases reflect politics and pressure, because rates have remained unchanged since July 2010 when the inflation rate was 5.5%.But now it grew to 9.5% which can not be ignored. My forecast will be for inflation at 10.5%-11% for 1H 2011 and than we can see a moderation of the rate easing to 9% at the end of 2011. However, that will happen only if: Russia and the rest of the world has a good harvest, oil prices stabilize and the rouble continues to strengthen."
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