Forecast for reducing the key rate c. Central Bank key rate forecast

The Board of Directors of the Central Bank lowered the key rate by 0.5 percentage points, to 8.5%, and promised to make the next reduction before the end of the first quarter of 2018. Experts expect that banks will now soften consumer lending conditions

Photo: Andrey Rudakov / Bloomberg

​The Board of Directors of the Bank of Russia at a meeting on September 15 lowered the key rate by 0.5 percentage points, to 8.5%, the regulator said in a statement. “On the horizon of the next two quarters, the Bank of Russia admits the possibility of reducing the key rate,” the Central Bank said in a statement. The head of the Central Bank of Russia, Elvira Nabiullina, commenting on the decision on the rate, promised that further decisions “will comply with the principles of smoothness and gradualism.” At the same time, both a pause in policy easing and a rate reduction of 0.25 or 0.5 percentage points are possible, she added.

Strong deflation in August was a key factor for such a wide move by the Central Bank on the rate. As the bank emphasizes, inflation in the non-food goods market is decreasing, and the growth in prices for services has stabilized at about 4%. The rise in prices for food products is also slowing down due to the seasonal reduction in prices for fruits and vegetables.

According to the Central Bank, the medium-term risks of inflation exceeding the target value of 4% by the end of 2017 prevail over the risks of a sustainable deviation down from 4%. At the same time, the regulator on Friday lowered the inflation forecast for the end of 2017 to 3.5-3.8%. As the chairman noted, the Central Bank considers these forecasts to be in line with the target - close to 4%.

The Central Bank lowered the key rate for the fourth time in a year: on March 24, the rate decreased by 0.25 percentage points, to 9.75%, on April 28 - by 0.5 percentage points, on June 16 - by 0.25, up to 9%. Following the results of the previous meeting of the board of directors, the regulator took a break, noting that “inflation remains near the target level, and the recovery of economic activity continues. At the same time, short- and medium-term inflation risks remain.” Then the bank stated that there was still room to reduce the key rate in the second half of 2017. Thus, the Central Bank adjusted the signal in September, extending the period for easing monetary policy (MP) until the end of the first quarter of 2018.

What came before?

Following the meeting on Friday, September 15, experts expected continued easing of monetary policy and were inclined to lower the rate by 0.5 percentage points immediately. A week before the decision, the regulator noted the possibility of a reduction in the range of up to 0.5 percentage points. Most of the 41 economists surveyed by Bloomberg expected the rate to be cut by 0.5 percentage points, to 8.5%, and six experts believed that the regulator would reduce the rate by 0.25 percentage points, thus setting the path for a smoother achievement inflation target of 4% at the end of 2017. According to the results of a Reuters poll conducted on Monday, September 11, of the 23 economists surveyed, 20 expected a rate cut by 0.5 percentage points, the remaining three by 0.25, to 8.75%.

The reasons for reducing the rate were confirmed by statistical data: after inflation accelerated in June and July due to rising vegetable prices, in August it slowed to a historical low, falling below the regulator’s target level. ​According to Rosstat, weekly inflation in Russia in the period from September 5 to September 11, 2017 was at zero compared to deflation of 0.1% a week earlier. Since the beginning of the year, consumer prices have increased by 1.7%, and since the beginning of September prices have decreased by 0.1%. At the same time, in the comparable period of last year (from September 6 to 12), the statistical agency also recorded zero inflation. Thus, in annual terms, inflation as of September 11 was about 3.2%.

Impact on the ruble

The ruble to dollar exchange rate changed slightly after the announcement of the rate, showing a decrease from 57.54 rubles. at the opening by 0.12%, to 57.61, by 15:05 Moscow time. The ruble/euro exchange rate remained virtually unchanged, remaining at the opening level of 68.86 rubles.

As Sergei Romanchuk, head of operations on the foreign exchange and money markets of Metallinvestbank, notes, the projected assessment of the ruble exchange rate by the end of the year is around 58.5 rubles. per dollar, therefore, in the current conditions, it is impossible to assume that the ruble will deviate greatly from the values. At the same time, Promsvyazbank analysts expect a moderate weakening of the ruble to 59-60 rubles by the end of the year. for a dollar. “In recent months, the ruble has been highly correlated with other currencies of developing countries and is strengthening due to good demand for carry trade operations, however, in the future, the policies of the Federal Reserve and the Central Bank may gradually tighten and limit the strengthening of the currency,” says the bank’s leading analyst Roman Nasonov.

Alfa Bank chief economist Natalya Orlova notes that the Central Bank’s release following Friday’s meeting is not very different from the July publication. Thus, she explains, the Bank of Russia is trying to show the market that inflation is slowing down in accordance with the regulator’s forecasts and is giving a signal that it will maintain a moderately tight monetary policy without a radical reduction in rates.

How will the rate change by the end of the year?

According to Vladimir Bragin, director for analysis of financial markets and macroeconomics at Alfa Capital Management Company, there is no fundamental difference between lowering the rate on Friday by 50 or 25 bp. and it was not, because in any case the market was given a signal to resume the monetary easing cycle. In his opinion, the total rate reduction by the end of the year is unlikely to entirely depend on today’s decision of the Central Bank. “The main question is where the key rate will be at the end of the monetary policy easing cycle,” the expert believes. “And there is an important difference between whether inflation stabilizes at 4%, 3% or lower.”

According to the head of the Gazprombank strategy development center, Yegor Susin, the decline means that the regulator has begun to look more positively at economic growth, while at the same time, inflation deviation below the target of 4% is a local and short-term phenomenon due to seasonality.

Chief economist of the Eurasian Development Bank Yaroslav Lisovolik predicts that at the end of the year the rate will reach 8.25%. The Central Bank always acts cautiously, but by the end of the year it will reduce the rate to 8-8.25%, says Anton Tabakh, chief economist of the Expert RA rating agency. “Russia is the only large country that has such high rates,” the expert believes. “This is an attraction of unparalleled generosity that will continue to attract speculators.”

However, after the Central Bank announced its decision, economists began to adjust their forecasts. “Although the possibility of reducing the rate before the end of the year still remains, the regulator has nevertheless extended the time frame for easing monetary policy. In this regard, we have slightly adjusted our forecast for the rate and expect that by the end of the year it will be not 8-8.25%, but 8%,” says Oleg Kuzmin, chief economist at Renaissance Capital in Russia and the CIS.

How will rates change?

The regulator’s current decision on the rate was based on market expectations, so the process of reducing rates on deposits and loans will continue, although not so dynamically, says Natalya Shilova, director of the center for macroeconomic forecasting at B&N Bank. “Rates on deposits have been actively decreasing for a long time and by the end of the quarter they could decrease by 0.2-0.3 percentage points,” she says. The expert notes that the greatest movement should be expected for unsecured consumer loans and credit cards, for which rates are now about 20%. “Rates for them may decrease by 1-2 percentage points. by the end of the year,” she adds. Mortgage lending rates are now at a historical low, so by the end of the year the rate may drop by no more than 0.5 percentage points, experts say.

Rates on deposits and loans will decrease by 0.3 and 0.4 percentage points by the end of the year. Accordingly, Roman Nasonov predicts.

Growth will be higher, but reforms are needed

Along with the announcement of the rate cut, the Central Bank increased its forecast for GDP growth at the end of 2017: if previously it was 1.3-1.8%, it has now improved to 1.7-2.2%. If we consider these expectations at the upper level, they make the Central Bank the most optimistic forecaster of the dynamics of the Russian economy for this year. Before him, the Ministry of Economic Development could be considered as such - the department predicted growth of 2%, and in August the forecast of growth was up to 2.1%.

The Central Bank draws attention to the fact that economic growth in the second quarter exceeded expectations (if the Bloomberg consensus forecast was growth of 1.7%, then in fact it was 2.5%). “Economic growth was supported by investment and consumer demand, as well as the restoration of industrial inventories,” the regulator notes. Growth was supported by abnormal investments, which grew by 6.3% in the second quarter. However, Central Bank analysts explained this dynamics by temporary factors, in particular investments in the construction of a bridge across the Kerch Strait and the Power of Siberia gas pipeline.

“In certain industries, the acceleration of growth was associated with both sustainable and one-time factors, the influence of which is likely to decrease in the second half of the year, which is partly confirmed by statistical data in July,” the Central Bank emphasizes. Rosstat does not publish monthly GDP dynamics, but the Ministry of Economic Development in July reported a slowdown in growth to 1.5%, which was due to weaker indicators in agriculture, industry and trade, although they were partly offset by construction. The most pronounced deterioration in dynamics was in the manufacturing industry, but in general, the July data should not be perceived as a change in the positive trend, the Ministry of Economic Development stipulated.

In any case, the economy is now “close to its potential level,” the Central Bank assessed on Friday: “Limitations to economic growth may be a shortage of production capacity, as well as the situation in the labor market, where there may be a shortage of qualified personnel in certain segments.” Growth above 1.5-2% is possible only with structural reforms, the regulator once again reminded. The Ministry of Economic Development has a more optimistic long-term forecast - above 2%. The Central Bank assesses economic growth in a more traditional way compared to the Ministry of Economic Development, without succumbing to excessive optimism, says Dmitry Polevoy, chief economist at ING for Russia and the CIS. The ministry, in its baseline forecast, expects growth to accelerate to 2.3% by 2020, even with a decline in oil prices after 2017.​

Forecast of the Central Bank rate for 2019 and 2020 by quarter

Forecast for the 1st quarter 2019: the key rate of the Central Bank will be 7.75%. Forecast of the maximum value of the key rate 8.25%, minimum value 7.25%.

Forecast for the 2nd quarter 2019: the key rate of the Central Bank will be 7.5%. Forecast of the maximum value of the key rate 7.75%, minimum value 7%.

Forecast for the 3rd quarter 2019: the key rate of the Central Bank will be 7.5%. Forecast of the maximum value of the key rate 7.75%, minimum value 7%.

Forecast for the 4th quarter 2019: the key rate of the Central Bank will be 7.25%. Forecast of the maximum value of the key rate 7.5%, minimum value 6.75%.

Forecast for the 1st quarter 2020: the key rate of the Central Bank will be 7%. Forecast of the maximum value of the key rate 7.25%, minimum value 6.5%.

Forecast for the 2nd quarter 2020: the key rate of the Central Bank will be 6.75%. Forecast of the maximum value of the key rate 7%, minimum value 6.25%.

Forecast for the 3rd quarter 2020: the key rate of the Central Bank will be 6.75%. Forecast of the maximum value of the key rate 7%, minimum value 6.25%.

Forecast for the 4th quarter 2020: the key rate of the Central Bank will be 6.5%. Forecast of the maximum value of the key rate 6.75%, minimum value 6%.

Since September 2013, the most important rate of the Central Bank has been the Key Rate of the Central Bank, and before that, since 1992, the Refinancing Rate of the Central Bank served as such.

Key rate- the main indicator of the Central Bank’s monetary policy, which directly affects the cost of borrowing funds by banks. The value of the key rate is important for determining the level of interest rates on loans for enterprises and households. The key rate itself reflects the interest rate on loans to banks for 1 week.

Decisions on changing the Central Bank rate are made at the Meeting of the Board of Directors of the Bank of Russia on monetary policy issues. Meetings are held in 6-week increments (once every month and a half). Following the meeting of the Board of Directors, a press conference is held on the same day. And before that, at 13:30 Moscow time, a press release is issued with a decision on the Central Bank’s key rate.

The Board of Directors of the Bank of Russia began the year by reducing the key rate by 0.25 percentage points, to 7.5%. The Central Bank's decision was influenced by volatility in international financial markets and record low inflation in Russia

The Board of Directors of the Bank of Russia, at the first monetary policy meeting in 2018 on February 9, decided to reduce the key rate from 7.75 to 7.5%. Thus, the rate reached its lowest level since April 2014. The day before, most economists were inclined to believe that the rate would decrease by 0.25 percentage points.

Annual inflation remains at a consistently low level, inflation expectations are gradually declining, and short-term inflation risks have weakened, the regulator said in a statement. “In this regard, the balance of economic and inflation risks has shifted somewhat towards risks for the economy,” the Central Bank writes. — Uncertainty has increased regarding the situation in global financial markets. At the same time, the probability of annual inflation exceeding 4% this year has decreased significantly.” The regulator noted that it will continue to reduce the key rate and allows the transition from moderately tight to neutral monetary policy to be completed in 2018.

Chairman of the Bank of Russia Elvira Nabiullina said in early February that the Central Bank would quickly reduce the key rate after devaluation risks were removed. This, she added, would allow us to quickly move to the level of a neutral rate - 6.0-7.0%. The regulator previously expected to reach this level in 2018-2019.

The ruble strengthened after the announcement of the decision of the Bank of Russia. According to the Moscow Exchange, in 10 minutes. after the publication of the Central Bank press release, the dollar exchange rate decreased by 19 kopecks, to 57.93 rubles. Euro exchange rate in 10 minutes. lost 26 kopecks, falling to 71.02 rubles.

In 2017, the Central Bank increased the key rate six times, the overall decrease was 2.25 percentage points. At the last meeting last year on December 15, the board of directors of the Central Bank, contrary to the more restrained expectations of economists, reduced the key rate by 0.5 percentage points, to 7.75%. The regulator then explained its decision by reducing pro-inflationary risks over the horizon of up to a year in connection with the extension of agreements on limiting oil production. At the same time, the Bank of Russia promised to gradually move from a moderately tight to a neutral monetary policy, allowing for the possibility of some reduction in the key rate in the first half of 2018.

Expected Solution

On the eve of the Central Bank's decision, 33 out of 40 economists surveyed by Bloomberg predicted a rate cut of 0.25 percentage points. Macroeconomists interviewed by RBC expected the same decision, pointing to instability in international financial markets in the last week. “Inflation continues to slow down rapidly and at the end of January is already 2.2%,” noted Vladimir Bragin, director for analysis of financial markets and macroeconomics at Alfa Capital Management Company. “High volatility in stock markets is a reason for caution on the part of the Central Bank and spoke in favor of a reduction of a quarter of a percent.” “The current market conditions indicate a negative process: the correction in stock markets and the fall in oil prices on international markets continue, which one way or another may have an impact on the Russian market,” says Yegor Susin, head of the Gazprombank Strategy Development Center. “The situation on foreign markets has deteriorated greatly: the stock market continues to sell off, oil prices are adjusted downward, which puts pressure on the ruble,” says Raiffeisenbank analyst Denis Poryvay.

After three years of consecutive decline, inflation in Russia has reached a record low. At the end of 2017, it amounted to 2.5%, with the Central Bank’s target value being 4%. “The slowdown in annual growth in consumer prices may continue in the first half of 2018, which is partly due to the effect of last year’s high base for food inflation,” the Central Bank said in a statement. “According to the Bank of Russia’s forecast, annual inflation will remain below 4% in 2018 and will be close to this level in 2019.”

Due to seasonal risks of the ruble weakening by the middle of the year and the fact that current deflationary factors will fade, inflation is expected to accelerate towards 4% by the end of the year, Susin adds.

Could the rate cut be greater?

At the same time, some experts pointed to a small probability of a more active rate cut. For example, according to data from the Moscow Exchange on the dynamics of money market indicators, the probability of such a scenario was estimated at 60% based on quotes for the RUONIA rate (indicative weighted ruble overnight deposit rate of the Russian interbank market). The RUONIA rate as of February 7 is 7.07%; since January 1, its value has not exceeded 7.37%. Poryvay from Raiffeisenbank noted that a decrease of 0.50 p.p. perhaps taking into account the fact that the RUONIA rate is much lower than the key rate.

In addition to low inflation, the basis for a reduction of 0.50 percentage points. There were also low consumer activity, high oil prices relative to forecasts, even despite the current correction, adds Yegor Susin. “The main task of the Central Bank is to create anchored inflation expectations. Currently, expectations remain towards the target level, and this assumes a gradual reduction in the rate,” he adds.

Impact on lending rates

The Bank of Russia noted the easing of monetary conditions in 2017. “The decision taken on the key rate and the potential for its subsequent reduction will contribute to further easing of monetary conditions, which will create the preconditions for annual inflation to approach 4%, supporting the growth of domestic demand,” the Central Bank said in a statement.

The availability of credit resources has increased over the past year due to the Central Bank’s systematic reduction of the key rate, recalls Oleg Kuzmin, chief economist for Russia and the CIS at Renaissance Capital. “The decision to reduce the rate by another 0.25 percentage points. will be reflected in the cost of loans in 6-12 months, depending on what monetary policy the regulator will continue to adhere to,” he argues.

Impact on the ruble

The step taken by the regulator to reduce the rate will not have a big impact on the ruble, experts are sure. A relatively stable ruble is expected until the end of the year, and the end of the year may be at the level of 57-58 rubles. per dollar, says Natalia Shilova, director of the center for macroeconomic forecasting at B&N Bank. “This forecast does not imply significant sanctions and takes into account the average annual oil price of $60,” she clarifies. Binbank believes that the Russian currency will remain stable due to the growth of the trade balance surplus.

According to Yegor Susin, the Central Bank's decision will not have a significant impact on the ruble, since it was the basis of the market consensus. Gazprombank predicts that by mid-2018 the ruble will traditionally weaken and may reach 61-62 rubles. for a dollar.

“Currently, the determining driver for the ruble is the general sentiment of investors regarding the entire group of currencies of developing countries,” says Mikhail Poddubsky, leading analyst of the debt market analysis group at Promsvyazbank. “We see that the ruble remains highly correlated with other currencies of emerging markets, which, coupled with oil prices, has a major impact on the exchange rate of the Russian currency.”

The further dynamics of the ruble will be influenced by external factors. “If volatility in global markets begins to decline and nervousness gradually subsides, then in the context of seasonally strong current account balance indicators in the first quarter, the ruble has every chance of demonstrating another wave of strengthening,” says Mikhail Poddubsky. “The dollar/ruble pair may over the next couple of months rewrite the lows observed this year.”

Forecast for 2018

The key point of the Central Bank’s decision is the transition to a neutral monetary policy already in 2018, and given low inflation and weak economic growth, there is a high probability that the rate could be reduced to 7% as early as March, says the director of the analytical department of Loko-Invest » Kirill Tremasov. According to Oleg Kuzmin, the Central Bank will stop reducing the key rate after it reaches 7%, which, according to his forecasts, will happen at the next meeting.

No certainty

It is not yet clear what exactly the neutral rate level will be, says Natalia Shilova. “The previously announced corridor was 6-7%, given that after the current decision the key rate is 7.5%, by the end of the year we can expect a further reduction in the rate from 50 to 150 bp,” the expert believes. — This is a significant spread of values ​​and expectations across the market. We expect that by the end of the year the rate will be reduced to 6.5-6.75%.”

However, if the situation on international markets continues to deteriorate, then the rate may remain at 7% by the end of the year, concludes Yegor Susin.

The Russian bank decided to leave the main rate. In two thousand and fifteen, inflation continued to decline. Consumer prices increased by 15 percent. Then there was a decrease in monthly inflation due to favorable conditions in the agricultural market. Citizens' nominal incomes gradually increased. Annual inflation began to decline because consumer prices began to rise sharply, but this happened slowly and not as predicted.

Will there be an opportunity to save ruble savings?

The impact on prices is contained by moderately tight monetary credit conditions. The growth of the money supply increased faster, but without reaching its highest state. Deposit and lending rates were reduced in connection with previous decisions of the Central Bank to reduce the key rate. Thus, the level of deposit and lending rates makes it possible to maintain ruble savings and maintain a high debt burden with increased requirements for borrowers, and lending becomes slow.

Preliminary statistical estimates show that the GDP contraction has slowed. Industrial production and investment began to decline more slowly, but at the same time consumer demand began to decline rapidly. Negative demographic trends emerged and a low unemployment rate emerged. After real wages began to decline and underemployment began to rise, the market began to adjust to new circumstances.

What can consumers hope for?

Current trends will continue in the near future. Citizens' incomes will increase at a low rate and retail lending will curb consumer spending.

The weak background of investment activity will continue due to uncertainty in the economy. Containment of investment demand will occur by replacing an external source of investment with an internal source, since the Russian financial market is narrow and companies have a high debt burden. Some investment support was provided with government measures. Unfavorable conditions on the global commodity market have contributed to a decrease in the value of the export mass. Only with weak domestic demand did import volumes drop significantly in value. Therefore, everything in this area remains in a positive state.

Bank of Russia forecasts

How the economic situation will develop in the future depends on how quickly the economy will adapt to external shock events. The Russian Bank predicts that domestic financial conditions will gradually ease, the debt burden will decrease, and business sentiment will improve by 2017. Thus, it will be possible, hopefully, that investment and production activity will recover. Thus, the incomes of citizens will increase, and consumer demand will be activated by two thousand and eighteen. GDP will decline more slowly this year. Economic growth will be one percent.

From the beginning of this year there will be a decrease in annual inflation, due to the high rates of two thousand and fifteen. Foreign trade restrictions with Turkey will not significantly affect consumer prices. These restrictions may increase inflation in early 2016. Annual inflation will decline over the next two years due to weak consumer demand with moderately tight monetary conditions. As consumer prices slowly rise, inflation expectations will begin to decline.

The Russian bank predicts that consumer prices will increase at a rapid pace. With the monetary policy implemented, consumer prices will increase by six percent.

If the foreign economic situation continues to deteriorate and prices for petroleum products remain unchanged and the Chinese economy grows slowly, then inflation risks may arise. Also, if inflation declines, inflation expectations may not remain elevated for long. We will have to reconsider the rates for subsequent years, adjust tariffs and prices with indexation of budget payments. This information is taken from the source of the Central Bank of the Russian Federation.