July 31, 2018 / 2:51 PM / 4 months ago

Russian inflation seen picking up due to VAT increase: Reuters poll

MOSCOW (Reuters) - Russian inflation is likely to climb above previously expected levels, providing the central bank with no room to cut interest rates this year, a monthly Reuters poll of 25 analysts and economists showed on Tuesday.

The revision in inflation forecasts comes after the lower house of parliament approved an increase to value-added tax (VAT) that should help the government to raise extra funding for decrees ordered by President Vladimir Putin.

Inflation, the central bank’s responsibility, is on track to accelerate to 3.8 percent by the end of this year and then to 4.3 percent by the end of 2019, the July poll showed.

In late June, two weeks after the government has proposed to raise VAT to 20 percent from 18 percent from the next year, annual inflation was forecast at 3.5 percent at the end of 2018 and at 4.0 percent at the end of 2019.

“The central bank would need time to assess the impact of the higher VAT, so we price in a 25-basis-point rate cut to 7 percent in June 2019,” analysts at Morgan Stanley said.

Analysts at Renaissance Capital predicted a rate cut no earlier than in the third quarter of 2019 as annual inflation exceeds the central bank’s 4.0 percent target early next year, up from 2.3 percent seen in June.

“Given that we believe the CBR follows a ‘close-but-below’ approach to inflation targeting, we do not think it would be comfortable easing policy while headline inflation remains – or could rise – above 4 percent and the key rate is very close to the neutral range,” Renaissance Capital said.

The central bank held its key rate at 7.25 percent last week, and the market, on average, expects it to keep the benchmark cost of borrowing at that level at least till the first quarter of 2019.

Economic growth prospects this year have remained unchanged for now. The consensus forecast for 2018 gross domestic product growth was confirmed at 1.8 percent, the poll showed.

The forecast for the rouble was slightly revised, predicting the Russian currency would remain under pressure.

The rouble is now seen at 63.08 against the U.S. dollar in 12 months compared with 62.40 on Tuesday afternoon RUBUTSTN=MCX. A month earlier, the poll predicted the rouble would be at 62.25 per dollar in one year.

Writing by Andrey Ostroukh, editing by Larry King

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