• Bank Rossii keeps rates unchanged.
• Sanctions and weakening RUB are pushing inflation up.
• NPL growth continues.
• New sanctions get tougher than ever.
Assessment and outlook
Russia’s central bank left its key rate unchanged at 8.00% at today’s monetary policy meeting. The decision was broadly expected by consensus despite recent deterioration in the geopolitical environment, a weakening rouble and accelerating inflation.
Bank Rossii sees inflation risks materialising as the geopolitical situation remains tense and the food ban, together with the weakening rouble, is pushing prices up. The central bank sees CPI staying over 7% y/y until the end of 2014, significantly exceeding the 5% target. Inflation expectations are also boosted by a possible introduction of a sales tax or VAT increase. Despite the central bank’s expectations that ‘the current monetary policy stance will ensure a decline in consumer price growth rate to the target of 4% in the medium run’, we interpret the latest statement as being slightly hawkish for Q4 14. It reiterated that ‘if inflation expectations remain at the elevated level and the threat of inflation exceeding the target in the medium term emerges, the Bank of Russia may continue raising the key rate’.
Russian countersanctions on certain food imports from Australia, Canada, the EU, Norway and the US have fortified inflation expectations. Early September consumer prices have risen more compared with a year ago and there has been no sign of traditional late summer deflation. Following the monetary rate decision at July’s meeting, inflation posted 7.5% y/y – far from the 5% target. The latest figure indicates 7.7% y/y CPI with core inflation speeding up to 8.0% y/y in August. At the same time, the RUB has lost 4.5% against the dual currency basket since 25 July. As the inflation environment remains challenging, we expect a 50bp hike in Q4 14. The next meeting of Bank Rossii’s board of directors on the key rate will be held on 31 October 2014 at 11:30 CET.
Non-performing loans are growing at an alarming rate
Bank Rossii is facing a challenging environment as geopolitical woes continue, economic growth is approaching zero and, according to our 2014 forecast, turning negative. Bank Rossii expects the Russian economy to grow 0.4% y/y in 2014. At the same time, the central bank’s monetary policy is hitting private consumers through a demand-side shock. Bank Rossii has stated that ‘given interest rate growth and an increase of requirements to borrowers, lending sees a further decrease’. As interest rates for consumer debt remain high (the weighted-average annual rate for consumer loans under a year in RUB was 28.1% and in USD 12.3% in June 2014), low growth of real wages has put more of a debt-servicing burden on Russian households. Overdue debt is approaching 5.5% already.
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