Tuesday, April 16, 2024
HomeTraditional FinanceEconomy"Russian Inflation Drops Below 4% Target for First Time in a Year"

“Russian Inflation Drops Below 4% Target for First Time in a Year”

Consumer inflation in Russia dropped below the central bank’s 4% target for the first time in a year, according to data from the state statistics service Rosstat. This comes as the base effect of last year’s double-digit price increases takes hold. In March, annual inflation stood at 3.51% year-on-year, down from 10.99% year-on-year a month earlier. Analysts had expected a slowdown to 3.4%.

Why did inflation drop?

Inflation soared to almost 20% last year when Russia sent tens of thousands of troops into Ukraine. However, the base effect of this increase caused inflation to drop below the central bank’s target in March. The currency also played a role, with the rouble losing almost 25% since an oil price cap on Russian exports came into force in early December. This eased inflationary pressure last year but is now more likely to have a pro-inflationary impact in 2023.

Russia Inflation graph

What are the implications of lower inflation?

The drop in inflation is good news for Russian consumers who regularly cite inflation as a key concern. Rising prices have dragged living standards down across the country, particularly for those who have no savings after a decade of economic crises. However, lower inflation may not be good news for the economy as a whole. Analysts believe that above-target inflation will prevent the central bank from trimming its key rate this year, squeezing growth prospects.

What does the future hold for inflation in Russia?

The central bank expects inflation to move back above the target later this year, likely ending 2023 in the 5%-7% range. The economy ministry said inflation was running at an annualised rate of 3.15% as of April 10, slowing from 3.29% a week earlier. Analysts polled by Reuters believe that inflation risks remain, particularly from the demand and exchange rate side. This suggests that the central bank will continue to see more chances of a rate hike than a rate cut in the near future.

Russia Inflation Graph

What could happen next?

Some analysts believe that the central bank may raise rates at the April 28 meeting. A month-on-month rise of 0.37% in March equates to around 4.3% at a seasonally adjusted annual rate. This figure, coupled with the strong decline of the rouble, could lead to a rate hike. Central Bank Governor Elvira Nabiullina has said that the bank remains concerned about inflation risks, particularly from the demand and exchange rate side. Dmitry Polevoy, head of investment at Locko-Invest, said that the central bank was unlikely to change its hawkish signal and would maintain concerns about inflation risks. However, if these risks decrease slightly from the budget side, there could be a chance of a rate cut.

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