Priority is currency stability
While stronger food prices were mainly responsible for the upside surprises in previous months, it was the higher core inflation in February. The 0.9% MoM rise in core CPI was much higher than the market consensus of 0.1% and the JPMorgan forecast of 0.3%. Such strength mainly shows the extent of the forex pass through. It also implies that domestic demand could be stronger than what the market players assume. We keep our year-end CPI forecast unchanged at 8.7% but note the increased risks to the upside. We think that the government’s priority is currency stability rather than lower interest rates at least in the pre-referendum period. This should provide more breathing room to the CBRT. We expect the Bank to hike the upper band and the late liquidity window by 100 basis points. The CBRT could use the strengthening in core CPI as an “excuse” for a more conventional hike and a 50 base points hike in the 1-week repo rate is also on the cards.