The key rate is likely to go up more

RUSSIA ECONOMICS - In Brief 09 Sep 2021 by Alexander Kudrin

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As Rosstat reported that inflation reached in August 6.68% y-o-y and 0.17% m-o-m, while there were no signs of deflation in early September (for the period from September 1 to 6 Rosstat reported 0.06% inflation), the CBR will most likely raise its key rate tomorrow by 25-50 bps.Even though a strong seasonal deflation was recorded in August in the segment of fresh fruits and vegetables (by 8.39% m-o-m), it was not enough to offset rising prices in other segments of the consumer market. Food prices (excluding fruits and vegetables) grew in August by 0.56% m-o-m, non-food prices were up by 0.80% m-o-m. Prices in the services segment grew by 0.32% (also m-o-m).Even though the consumer credit market started cooling down from July, “election bonuses” (one-off payments to military, power structures, and pensioners) in August and September fueled consumer demand. In October, it will be also supported by the indexation of wages for some categories of employees in the public. Additional budgetary spending ahead of the Duma elections creates additional inflationary pressure, which will be short-lived, but quite strong. The scale of such election stimulus was hard to envisage. Therefore, seasonal deflation should be ruled out in September (inflation may reach 0.3% this month).In August y-o-y inflation already reached 6.68% and in September it may exceed 7%. From October, y-o-y inflation will start coming down.In such an environment the CBR has limited options apart from additional rate hikes – by 50 bps by the year-end. There are two possibilities. One implies adding 25 bps tomorrow and then another 25 bps on the next meeting on October 22. Alternatively, the key rate may be raise...