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Inflation crossed the peak

Since the end of March, Rosstat has recorded a zero increase in consumer prices, and last week the annual inflation for the first time in a long time fell to 5.2%. There is the reason to expect that this is the beginning of a new trend: the Ministry of Economic Development has already announced that the peak of inflation was passed in March 2019 The Central Bank reacted to this with scepticism, but the chances of an earlier reduction in the key rate, than most analysts expect, are growing.

Double zero Last week Rosstat reported that inflation in Russia from April 2 to 8 was zero. This growth rate of consumer prices is not a typical phenomenon for this period, but the zero result has been recorded for the second week in a row. As a result, decreased by 0.1 p.p. to 5.2% and annual inflation.

We can say that she did it ahead of time. In any case, such dynamics do not fully correlate with the March estimates of the Bank of Russia. “The peak of annual inflation will be passed in March-April - the effect of the base will have an effect,” said Elvira Nabiullina, the Bank of Russia chairman, in a March 22 statement. The peak of inflation will be, according to our updated estimates, about 5.5%. Let me remind you that in December we did not rule out that inflation could significantly exceed this level”.

However, recent data indicate that the peak of inflation was passed almost simultaneously with this statement, amounting to 5.3% per annum. And if the period when this happened is still within the March-April timeframe, then the 5.5% target implies a longer growth. This means that not only the December but also the March estimates of the Central Bank can be considered too pessimistic. Meanwhile, at the beginning of the month in the bulletin “The Picture of Inflation. April 2019 “The Ministry of Economic Development and Trade confidently stated: “The annual inflation rate in April will be 5.1-5.2% year-on-year. Thus, in March, annual inflation reached a peak, after which its rates will start to decline and, with a stable ruble exchange rate, will drop to 4.3% by the end of the year”. At the same time, it reiterated its earlier statement on the “exhaustion of the effect on prices from the increase in VAT”.

The Central Bank was not ready to agree with the latter either on the eve of the March meeting on the rate or at the beginning of April, believing that tax increases could still affect prices as goods are replaced in warehouses and new contracts are concluded. Other ministry claims at the Bank of Russia were also treated with scepticism, even taking into account zero inflation at the end of March. “It seems to me that it’s too early to declare this, until we saw at least the beginning of April, of course, we are now approaching the peak, but nevertheless, in order to draw final conclusions, I would still wait for the statistics”, transmitted to Reuters the words of the first deputy chairman of the Central Bank, Ksenia Yudaeva, a day before the publication of data for April 2-8. At the same time, she admitted that the figures for the end of March are only indirectly related to reality: “Sometimes it happens in the last week of a month, when Rosstat has already given monthly data and collects weekly, it adjusts weekly inflation to ensure that the general inflation figures are weekly about the same numbers that he gets monthly”.

Peak optimists

Anyway, now the latest forecast and conclusions of the Ministry of Economic Development look more realistic - after all, they coincided with the current statistics. It must be said that his estimates of future inflation were also more optimistic last year than those of the Central Bank. But in the period of accelerating growth in consumer prices, this was not a very advantageous position - the ministry's forecasts were regularly lost by the central bank in accuracy. In times of declining inflation, the situation has a chance to be inverse. And the discrepancies in the estimates of inflation expected by the end of 2019 by the Central Bank and the Ministry of Economic Development, meanwhile, are not only present but also large.

In March, the Bank of Russia lowered its forecast by 0.3 percentage points to 4.7-5.2%, accompanied by a noticeable softening of the rhetoric, mentioning the possibility of reducing the key rate this year. But the Ministry of Economic Development, as already mentioned, is waiting for “with a stable ruble exchange rate” of only 4.3%. This is noticeably below even the lower limit of the expected range of the Central Bank. If he suddenly wanted to bring his forecast in exact conformity with this estimate, then two such revisions would be required, as in March. And you can imagine what kind of rhetoric this action should have been followed. And the events are still developing in the forgotten direction over the last year, confirming the opinion of optimists. High stakes do their work by suppressing inflation. Excessive pressure on prices from demand in the country with declining real incomes of the population not for the first year is not observed and is not expected, even taking into account the growing consumer lending. The ruble exchange rate is not just stable, but in general, has been growing since the beginning of the year.

From a local minimum of January 3 (71.45 rubles for a dollar), he added about 10% to last week. Actually, the rise and fall of the dollar in Russia partly explains the discrepancy with the reality of Central Bank forecasts this year, and the Ministry of Economic Development - in the past. Still, the effect of transferring exchange rate fluctuations on prices in Russia has not been cancelled. And the chances of both further strengthening the ruble, and the fact that it does not fall too far from current levels, at the very least, are present. Brent crude prices last week rewrote a 5-month high. Thanks to the budget rule, their growth, which has been going on since the beginning of the year, is not as strong as it once was, influencing the ruble exchange rate, but sometimes psychological influence is enough. The inflow of funds from non-residents to the Russian market continues, which allows the Ministry of Finance to conduct record OFZ auctions and take new heights to stocks. Last week there was one and the other (for more details, see page 13).

Light line

At the same time, the Fed also noticeably softened its rhetoric, declaring a slowdown in the reduction of assets on the balance sheet and refusing to increase the rate this year, and the White House already calls to reduce it by 50 b.p. At the same time, the ECB continues a soft monetary policy, announcing a new round of TLTRO (targeted operations for long-term financing of banks) from September of this year to March 2021 The fiscal rule, which reduced the dependence of the ruble on oil, increased its sensitivity to cross-border capital flows. Last year, it played into the hands of the “bears”, now - the bulls. In recent months, the main risks have been associated with US sanctions. But this ghost, which constantly hung over the Russian market, gradually began to seem to investors not so terrible, and the high yields of domestic securities, coupled with the strengthening of the ruble, provoked non-residents to resume the carry trade. Yes, and from the US Congress already heard the words of fatigue from the endless anti- Russian sanctions. This, of course, suggests that the blow, if it is inflicted, will be perceived harder than it could. But if it does not happen, then only inflationary expectations of the population and business will probably prevent more rapid decline in the rate of price growth. However, they are still steadily declining, and the situation objectively contributes to the continuation of this trend.

Now most analysts agree that the key rate will be reduced once by 0.25 p.p. in Q4. However, the forecasts of its twofold decrease this year and even the transition to the easing of monetary policy in the coming months have already appeared. In principle, in the process of raising the rate, the Bank of Russia has shown willingness to act promptly and even preventively. With the favourable development of the situation, by the summer it will be obvious that the reality is too different from the forecast. But the Central Bank is still not embarrassed to admit such “mistakes”, and it is all the more difficult to surprise analysts.

Source: www . fingazeta.ru

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