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Russia maintains interest rates despite inflation risks ahead

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Russia maintains interest rates despite inflation risks ahead PART 1 OF 1

Russia maintains interest rates despite inflation risks ahead

Russia maintains interest rates despite inflation risks ahead

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The Central Bank of Russia (CBR) maintained the overnight deposit rate at 4.5% and the fixed repo rate at 6.5%, which was expected by most analysts. The CBR, though, highlighted the issue of regulated tariffs indexation (starting in July) which will likely generate inflation in the third quarter of 2013.

The official inflation target band for for CBR is between 5-6%, though the January consumer price index (CPI) was 7.3% year-over-year; the consensus was that the government would not sacrifice economic growth to curve inflation. It was surprising, though, that the CBR once again thought that inflation would be likely to remain outside the target range through June 2013.

This is problematic because starting in July 2013, several monopolies’ tariffs will be indexed, which will likely increase inflation by approximately a full percentage point. That is because the tariffs indexation is expected to increase household tariffs by more than 10% and housing accounts for almost 10% of the CPI.

The effect on other prices in the economy is uncertain since it is unclear how much of the tariffs increase will be passed on to the consumer. Because of this, analysts don’t expect a change in rates until after August. From there the inflation caused by tariff indexation will be examined.

Investors in Russian equities (e.g. RSX, RSXJ) should realize that if inflation does spike out of control in the medium term, it will lead to depreciation of the Russian Rubble which can erode any local market gains. In the past this could have being mitigated with the Russian Ruble ETF (XRU), but this currency ETF no longer trades and there is no substitute available yet.

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