How to find clues to Bank of Russia's next step in consumer data

[MOSCOW] Russia's central bank is about get the one piece missing from its data jigsaw as it prepares to review interest rates next month.

Thinner wallets may shape the decision after the Bank of Russia last month extended its pause to six meetings and warned that a spike in salaries it struggled to explain posed a risk to inflation. Wages adjusted for inflation in April fell 0.5 per cent from a year earlier after growing in the previous two months for the first time since 2014, according to the median of 15 estimates in a Bloomberg survey. The data will be released by the statistics office on Monday.

With the central bank adamant about reaching its inflation target next year, policy makers are focusing on wages and tuning out much of the macroeconomic noise that includes a smaller-than-forecast drop in gross domestic product last quarter and a surprise gain in industrial output in April.

The uncertainty over wages is among factors that prompted the International Monetary Fund to advise keeping the pace of future easing gradual.

"The only reason for the central bank to significantly revise its policy stance can be a dramatic worsening of the macroeconomic situation, which isn't happening," said Dmitry Polevoy, chief economist for Russia and Commonwealth of Independent States at ING in Moscow.

"That's why in setting policy, the central bank will continue focusing on inflation, inflation expectations and the situation in the markets."

Inflation Risk?

Annual increases in nominal wages reached 8.7 per cent in February and 9 per cent March, exceeding the pace of inflation for the first time since Oct 2014.

The central bank has said that it needs the data for April to determine if the upswing was an aberration or a lasting trend that can lift consumer demand and accelerate inflation.

Price growth has already stalled in the past two months at 7.3 per cent from a year earlier, almost double the 4 per cent target. Last year's base effect may even result in a higher rate in May-June before disinflation resumes, according to the central bank.

Inflation expectations have remained elevated even as price growth plunged from a 13-year of 16.9 per cent in March 2015.

Higher wages have so far done little to cheer up the consumer, with domestic demand withering after a currency crisis and the crash in oil prices. Retail sales shrank at a slower pace in April, falling 5 per cent from a year earlier after a 5.8 per cent drop in the previous month, a survey shows. Unemployment was probably unchanged at 6 per cent.

The Russian currency has stabilized this year as oil prices rebounded, gaining more than 10 per cent against the US dollar after a 20 per cent loss in 2015. Derivatives traders are pricing in monetary loosening ahead. Forward-rate agreements are signaling 42 basis points in rate cuts during the next three months. The central bank has kept its benchmark at 11 per cent since July.

While policy makers last month shifted to an easing bias for the first time this year, first deputy governor Dmitry Tulin said the Bank of Russia decided it won't rush with easing and believes rate cuts will bring no "significant growth of the real economy."

That's testing the patience of business leaders like Andrey Kostin, chief executive officer of state-owned VTB Group, Russia's second-largest lender, who called on the central bank to cut by 2 percentage points at once.

"It's long past time to lower rates," Mr Kostin told reporters in Sochi on Friday.

"And it has to be done more decisively, to give the market a clear signal."

BLOOMBERG