Despite a modest rebound since the December 24 lows, global oil prices remain well below their 2018 levels. If sustained, we could see substantial falls in headline inflation. At current levels, Poland, Hungary, South Africa and Turkey are all benefiting. This should allow policymakers in these countries to remain dovish or turn less hawkish. Russia is a particular case, however, as the government has fixed domestic fuel prices until March. As such, we continue to expect the CBR to hike rates once more. In Turkey, lower oil prices should add to the factors driving inflation down. The headline rate decelerated to
20.3 percent y/y in December, below both our forecast of 20.9 percent and consensus expectations of 20.5 percent. A key driver of inflation in December was the transport fuel category, where the index fell 7.3 percent m/m, an early sign of the effect of lower oil prices. This sharp decline followed a 2.1 percent m/m fall in November and has contributed to the dovish comments being made by policymakers. The Central Bank also cited weak demand as a factor behind easing inflation, and this appears to have triggered concerns about possible premature policy easing. Our current trajectory points to inflation staying close to 20 percent y/y until May, before decelerating sharply in September to end the year below 16 percent. With this trajectory, we expect the CBRT to cut interest rates by 300bp in June and a further 200bp in September and have highlighted the risk of earlier cuts – possibly before the March 2019 elections. We highlight that that the inflation trajectory is based on an average oil price of US$72/bbl. Thus, we see downside risks to that profile if oil prices were to remain around current levels for longer – especially if one also considers that the tax cuts that were announced in October 2018 have been extended for a further three months ending March 2019.