“We expect the central bank to calibrate the stance of the monetary policy based on (1) dynamics of underlying inflationary pressures, (2) inflation projected one year from now, and (3) the risks to inflation projection. We expect the central bank to cut the monetary policy rate by 50 basis points in the first half of 2012,” the analysis reads.
Inflation gained 0.42% in November compared to October, while annual inflation dropped to 3.44% from 3.6% in October. In September and November, inflation hit two new lows since 1990, namely 3.45% and 3.44% respectively, as the annualized effect of the 2012 VAT increase disappeared.
The central bank’s managing board reduced in November the key rate to 6% from 6.25%.
“Underlying inflationary pressure in November remained low, with CORE 3 inflation rate (total CPI excluding administered prices, volatile prices and prices for tobacco and alcohol) remaining flat at a rate of 2.7% year-on-year. Our statistical measures of underlying inflationary pressures were also flat in November,” the report reads.
The analysts expect the annual inflation rate to keep declining in the upcoming months, to 3% in February 2012 and even below 2.5% in April-May, but this will only be due to the base effect.
“Firstly, there is a strong favorable statistical base effect stemming from dynamics of volatile food prices one year ago (Q4 2010 – Q2 2011). At the end of 2010 and the beginning of 2011 there was a spike in the volatile food prices of fruits and vegetables which was reverted recently. In November, volatile prices for fruits and vegetables were by 8.7% year-on-year below their level in November 2010. By June 2012, they should remain below their levels in the previous year. Accordingly, we think these prices might have a negative contribution of around 0.8 percentage points to the annual inflation rate in the first half of 2012. This means that the annual inflation rate would be very low in H1 2012,” the bank notes.
At the same time, Raiffeisen analysts added the government decided to postpone the increase of natural gas prices for volumes delivered to households. The postponement pushed the increase back to the end of the first quarter next year, which will also contribute to a reduction of inflation.
“However, there is not yet available the calendar regarding the adjustment of administered prices. While we are close to the end of the year, there are still no news from the National Agency for Energy Regulation with regards to the dynamics of the tariffs for electricity from January 2012,” the report reads.
The central bank revised in November the inflation forecast for the end of this year, to 3.3% from 4.6%, while the forecast for next year was reduced to 3% from 3.5%.