Consistent Russian Ruble’s depreciation adding concerns to Russian inflation risks

The inflation in Russia declined in August (per weekly data). We estimate that inflation was 15.5% YoY, down slightly from 15.6% last month (when the increase in utility prices pushed it higher). Russia inflation moderating in August could be followed by higher inflation if the RUB depreciation continues. The decline in inflation is due to falling food prices from the strong 2015 harvest.

At the same time, there appears to have been very little pass-through from the RUB sell-off. In our view, this is because of the volatility in the RUB exchange rate; it first depreciated up until February 2015 in a probable overshoot, and then appreciated as global oil prices rose, only to sell off again during May-August as global oil prices fell.

It appears that the RUB in the range of 65-70 was previously passed-through. However, this puts monetary policy on a dangerous threshold. Further RUB depreciation will likely start to push inflation higher. Furthermore, once the 2015 harvest is completed, seasonal downward pressures on food prices will likely dissipate, making the economy more vulnerable to inflation impulses.

This implies that a further CBR cut at its September 11 MPC meeting could be ill-advised as it might lead to more RUB depreciation that could boost inflation. We are switching our forecast to no change, forecasting that the CBR will keep its rate at 11%. However, this depends on the path of oil prices over the next two weeks.