VTB: Russia's CPI surprised with a deceleration to 6.5% YoY in October

According to Rosstat, in October the CPI growth declined to 6.5% YoY, from 6.6% YoY a month ago. In MoM terms, it added 0.5%. Food inflation gained 0.5% MoM and stayed at 7.3% YoY. Services inflation and non-food prices edged down to 7.2% YoY and 5.3% YoY, respectively (from 7.3% YoY and 5.4% YoY in September). Rosstat’s core inflation advanced to 5.8% YoY in October, from 5.7% YoY in the previous month. Inflation surprised with a deceleration in October. Headline CPI growth declined for the first time since April and, more importantly, this was driven by slowing core inflation. However, we believe this is only likely to become a full-blown trend in the early part of next year, and so are retaining our forecast of 7.3% YoY CPI growth for FY12. In an environment of declining CPI (both headline and core), it would be much harder for the CBR to increase repo rates, and the chances of October’s pause in the tightening cycle being extended has therefore increased. Hence, we believe that the CBR will likely narrow the interest rate corridor by increasing at least the deposit rate 25bp, marking an end to the current tightening cycle. Maxim Oreshkin, Daria Isakova VTB Capital analysts