​Inflation y-o-y likely to start slowing from 2Q21

RUSSIA ECONOMICS - In Brief 17 Mar 2021 by Alexander Kudrin

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Rosstat reported that inflation from March 10 to 15 was at 0.1%, while in previous weeks it remained consistently at 0.2% w-o-w. Prices on a broader group of products started to fall (including some vegetable prices) which helped inflation to decelerate. GKEM Analytica in the previous notes attributed an acceleration of inflation since 4Q20 to an unprecedented federal budgetary spending spree and its effect is gradually slowing. In March 2020, m-o-m inflation reached 0.6% and there is a chance that in March 2021 it may be slightly lower than that (cumulative inflation from March 1 to 15 reached 0.3%). If so, then y-o-y inflation may start decelerating already this month. By mid-year, it can naturally decelerate closer to 5% from the current 5.7%. By year-end, it will further naturally go down.Meanwhile, the Central Bank's rhetoric on the desirable level of neutral rate became quite hawkish in recent weeks as the regulator saw inflation on the rise. Therefore, one cannot rule out that the regulator may hike the rate on March 19, which makes little sense though. The liquidity situation which was tight earlier, softened recently as the Ministry of Finance injects cash to finance budgetary deficit (the latter looks very moderate) and Minfin’s borrowing activity is low. On top of that, as the oil price increased, the ministry injects liquidity by buying FX in line with the fiscal rule. Hence, banks’ structural liquidity balance turned from a deficit into a surplus, and the demand for refinancing from the CBR fell. RUONIA stays below the key rate as a result, the market situation is stabilizing and no action from the CBR is required. If the CBR chooses to hike the key rate, ...