Ahead of the Central Bank’s decision on interest rates this Friday inflation in Russia remains subdued.
As is known the Central Bank became alarmed at the further devaluation of the rouble early this year, which was caused by the second collapse in oil prices. It assumed that this second big devaluation would lead to a second spike in inflation. It even briefly predicted that inflation might rise as high as 16%.
On the strength of these fears the Central Bank has so far this year insisted on keeping interest rates high at their current level of 11.0%.
As Jon Hellevig and I have repeatedly argued, these inflation fears were misplaced and so it has proved.
Far from soaring, Inflation failed to rise in the first quarter above the weekly level of 0.1% – a rate of less than 6% over the whole year – at which it had settled in the second half of 2015. The very latest information in fact shows that inflation actually fell to zero over the course of the last week. Predictions the Central Bank was making just a few weeks ago that the annualised rate of inflation would go over 8% in June because of the base effect now look unlikely to be true. The Economics Ministry is saying it expects the annualised rate of inflation in June to be 7.3% – the same as in April and May.
The standard pattern of inflation in Russia is that it tends to rise in the winter and fall back in the summer. Last year, as inflation fell following the unwinding of the post-devaluation inflation spike, there were even some claims Russia might actually experience deflation in August. In the event that only happened during one week last August. However there is a higher probability that could happen this year because high food output is putting downward pressure on the price of some food products.
Inflation tends to pick up in Russia towards the end of the year. However at current rates it is not impossible that it could end well below 6% for the whole year.
If inflation for the whole year falls below 6% – as is looking increasingly possible – this would be the lowest rate of inflation Russia has seen since the USSR collapsed in 1991. It would also mean that the Central Bank’s inflation target of 4% inflation was within sight despite the unanimous view of Western Russia “experts” that it would not achieve it.
The fall in inflation is taking away the Central Bank’s reason – or pretext – for keeping interest rates at their present levels. With prospects for a rise in US interest rates put on hold because of poor US job figures in May and with oil currently trading higher than $50 a barrel there simply are no reasons to keep interest rates at their present level any longer.
At the time of the Central Bank’s last decision in April to hold interest rates steady the Economics Ministry made known its strong disagreement, taking the unusual step of publicly criticising the Central Bank and saying interest rates should have been cut by at least 50 base points.
The Central Bank itself intimated at the time of its decision in April that in the absence of a sudden deterioration it would cut interest rates in June. Since there has been no such deterioration an interest rate cut therefore looks all but inevitable. The only question is how deep it will be. Given the Central Bank’s excessive caution it is unlikely to be more than 50 base points. Whilst that would hardly be a significant cut, it would be a cut nonetheless and the market would hopefully treat it as a signal that the recession is indeed well and truly over and that more cuts are coming.