Cheaper Cucumbers Mean Russia May Cut Interest Rates This Month

(Bloomberg) -- A drop in prices for cabbages and cucumbers in Russia helped brake inflation in June, paving the way for the central bank to deliver a second consecutive interest-rate cut later this month.

Annual inflation eased to 4.7% in June from 5.1% in May, the Federal Statistics Service said Monday. Economists surveyed by Bloomberg had forecast price growth of 4.8%. Warm weather brought an early harvest this year, pulling prices for many fruits and vegetables lower, the central bank said. Monthly inflation was flat for the first time in almost a year.

The Bank of Russia is considering a reduction of as much as half a percentage point at its next rates meeting this month, Governor Elvira Nabiullina said last week. Her comments increased market bets for monetary easing, with currency traders pricing in 75 basis-points of cuts in the next nine months.

“The decline in near-term inflation risks reinforces the case for at least a 50 basis-point cut in the near future,” said Dmitry Dolgin, an economist at ING Bank in Moscow. “Most likely it will be two 25 basis-point cuts, one in July and one in September.”

Annual food inflation eased to 5.5% in June from 6.4% in May, with tomato and cucumber prices falling by about a third. Overall inflation may ease to 4.5%-4.6% in July, the Economy Ministry said on Monday, bringing it close to the central bank’s 4% target. A surge in the ruble this year has also helped the outlook.

Analysts at Morgan Stanley and the Russian Direct Investment Fund published notes after the inflation data came out, saying that a quarter-point cut in July to 7.25% is now likely. Four economists out of 13 polled in a Bloomberg survey are forecasting a cut, while the rest see no change.

What Our Economists Say:

“One-off factors, including food prices, are helping return inflation to target faster than expected, but broader price pressure is also soft, and so is demand. We now expect the central bank to cut rates when it meets later this month.”

--Scott Johnson, economist, Bloomberg Economics

The Bank of Russia may lower its end-of-year inflation forecast again after a revision down to as low as 4.2% last month, according to economists at VTB in Moscow. Inflation may fall below 4% early in 2020, they said in a research note.

--With assistance from Zoya Shilova.

To contact the reporter on this story: Anya Andrianova in Moscow at aandrianova@bloomberg.net

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Natasha Doff, Paul Abelsky

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