Excerpts from the Information Notice of Bank of Russia:
Annual inflation is on track to return to 4%, consistent with the Bank of Russia forecast. The annual rate of consumer price growth totalled 3.4% in September (3.5% according to the 22 October estimate). This September’s upward movement of inflation was largely driven by annual food price growth accelerating to 2.5%. This was supported by changes in the balance of supply and demand in certain food markets. Also, prices are adjusting to the ruble exchange rate that has weakened since the beginning of the year. According to Bank of Russia estimates, most annual inflation indicators reflecting the most sustainable price movements are growing.
The price expectations of businesses remain heightened, triggered by the weakening of the ruble which took place since the beginning of the year and the forthcoming VAT rise. Household inflation expectations, albeit lower in October, are markedly above the current year’s average Q1-Q2 readings. Uncertainty persists over their subsequent movements.
The domestic financial market saw a stabilisation in the second half of September and in early October, with exchange rate volatility declining. This was helped by the Bank of Russia’s September decision to raise the key rate and suspend foreign currency purchases in the domestic market under the fiscal rule through the end of 2018, as well as a certain stabilisation in the external environment.
The Bank of Russia forecast assumes consumer price growth rate at 3.8–4.2% by the end of 2018. One-off factors are expected to trigger a temporary acceleration in annual inflation, which will peak in the first six months of 2019 and run at 5.0-5.5% by the end of 2019. Quarterly year-on-year consumer price growth rate will draw close to 4% as early as the second half of 2019. Annual inflation will slow down to 4% in the first half of 2020 when the effects of the ruble’s weakening and the VAT rise peter out.
The Russian economy is growing at rates close to its potential. This September saw a rise in industrial output; sectoral output trends remained mixed, however. Consumer demand expanded at moderate rates, mainly on the back of non-food sales. Bank of Russia estimates show that investment growth was continued in the third quarter. The Bank of Russia keeps unchanged its 2018 annual GDP growth forecast of 1.5-2%.
The balance of risks remains skewed towards pro-inflationary risks, especially over a short-term horizon. The stabilisation in the domestic financial market comes with continuing uncertainty over future external conditions and their impact on financial asset prices.