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. Last Updated: 07/27/2016

Inflation Rate Falls to Lowest Level in 2 Years

The inflation rate fell to the lowest in two years last month as the cost of food slipped, paving the way for the Central Bank to cut its policy rates further.

The rate fell to 10.7 percent from 11.6 percent in August, the State Statistics Service said Tuesday.

“Prices are still hit by a depressed economy and spending power is certainly limited,” said Tom Mundy, a strategist at Renaissance Capital. The government’s anti-crisis spending package, which includes increased unemployment benefits, has yet to affect spending habits and push up prices, he said.

“This gives the Central Bank the room that it needs to lower its benchmark lending rate,” Mundy said.  

The Central Bank may lower the refinancing rate this month, which would be the eighth reduction since it started easing policy in April.

The economic recovery is being slowed by banks’ reluctance to lend in what Central Bank Chairman Sergei Ignatyev has called a “vicious circle” whereby banks’ wariness of delinquent debt begets the bad loans they fear.

Overdue bank loans rose to 5.8 percent of total lending in August from 5.5 percent a month earlier, while corporate loan books were unchanged in August after shrinking by 0.2 percent the month before, Central Bank data showed last week. Lending to consumers dropped 0.6 percent for the seventh consecutive monthly decline.

VTB Capital on Tuesday reported that the economy shrank in September at the slowest monthly pace this year.

Gross domestic product shrank 2.1 percent in August compared with the same month last year, after a 3.9 percent contraction in July. The economy shrank an annual 4.1 percent in the third quarter compared with 9.2 percent in the previous three-month period, according to VTB.

“The setback in industrial production in August was likely temporary and output might rebound strongly,” Alexandra Yevtifyeva, a senior economist at VTB Capital, said in the report. “The total activity index rose from 52.2 to 54 over the month, indicating an acceleration in economic recovery.”

“Growth in the services sector accelerated on new business orders, but was accompanied by a higher rate of job shedding,” Yevtifyeva said. “The latter remains the only factor that might hamper the otherwise optimistic near-term outlook.”

Tumbling prices for commodity exports caused the trade surplus in the year through August to narrow to $78.5 billion, down $72 billion from a year earlier, as prices of commodity exports tumbled, the Federal Customs Service said Thursday.

Exports in the period fell 45.7 percent from a year ago to $177.8 billion and imports were 43.8 percent weaker at $99.3 billion, the service said.

Energy, including oil and natural gas, accounted for 69.4 percent of exports to the Commonwealth of Independent States and the Baltic states in the first eight months, the customs service said. That compares with 73.6 percent in the same period last year.

(Bloomberg, MT)