WOOD Flash – Russia macro: the bottom of inflation, but not of the easing cycle

January inflation posted a new low of 2.2% yoy, down from 2.5%, continuing to surprise both the consensus and the CBR’s forecasts to the downside. Our models suggest that we are close to the bottom of inflation but, fundamentally, price pressure will remain weak in 2018-19E, leaving ample space for easing ahead. The ongoing restructuring of corporate balance sheets, the sanctions and the lower crude price than before are contributing to the disinflation phase. Our estimates for debt servicing costs for a standard mortgage suggest that affordability should improve greatly as a result of the easing cycle, which should prove to be an important stabilising mechanism for the country. We note that, although we see scope for rate cuts (200bps this year and a further 150bps in 2019), we may also see increased macroprudential measures and selective increases in capital requirements for some financial institutions as the central bank aims to limit excessively aggressive lending practices.