Headline inflation in October came out at 1.44% m/m pointing to an annual inflation rate of 7.16%, fell behind the expectations of 1.58% but slightly higher than our estimate of 1.40%. Meanwhile downward trend in core indicators continued, as I-index y/y change declined 7.04% in October and from 7.69% in September. In our view, October reading was another relief provided to the central bank on the inflation front, however, we do not think that clear skies are ahead.

We expect core inflation to be on the decline until yearend, and peak at 9% in mid-2017. Pass-through effect from a depreciated local currency may even lead further deterioration in inflation.

On the other hand, inflationary pressures from cost channels appear to be weak.

Going forward we expect the central bank to continue to implement a growth-friendly policy using liquidity tools rather than interest rates. Our prospect is for an average cost of funding rate remaining at 7.75% for some time to come, which is 25 bps higher than 12-month forward-looking inflation expectations.