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10.04.2008 - MDM Comment: Russia also a victim of "agflation"
Inflation in the first week of April reached 0.5%, with bread and grain prices being the core drivers, according to the Russian Federal Statistics Service. This takes cumulative year-to-date CPI to 5.3%, compared with 3.7% for the same period last year. The official full year target for inflation in 2008 is 9.5% vs the actual 11.9% last year.
We believe these developments increase the likelihood of another rate tightening action by the Central Bank (CBR). In February, the CBR increased its key rate (the overnight repo) for the first time in years, raising also the deposit rates and banks' obligatory reserve requirements. Since high-grade bond yields still provide a wide carry over the CBR's repo rate, and there is plenty of liquidity being pumped in from the budget, another 25bp rise in yields won't seriously damage the fundamentals of the local money or bond markets, in our view. However, we believe that, at least for psychological reasons, the increased risk of tightening will likely weaken market sentiment for ruble bonds.
