Central Bank holds key rate at 7.25%. The last time the regulator cut the rate in March 2018. The fed’s rhetoric has not changed — wait for the transition to a neutral monetary policy is no earlier than 2019
Photo: Andrew Lubimov / RBC
The Bank of Russia following the meeting of the Board of Directors on 27 July kept its key rate at 7.25%, which completely coincided with expectations of experts.
Central Bank says balance of inflation risks biased towards preinflation. “Uncertainty remains as to the degree of influence of fiscal measures on inflation expectations and uncertainty in the development of external conditions”, — said in a release regulator.
Most likely, the Central Bank believes that the transition to a neutral monetary policy in 2019.
As at the end of the June meeting, the Central Bank expects that by the end of 2018 inflation will be 3.5–4%, and in 2019 will temporarily exceed the target of 4% in connection with the planned increase in the VAT rate. To 4 percent inflation the economy will return to the beginning of 2020, predicts Bank of Russia. In July, the Central Bank expects the increase in annual inflation — from 2.3 to 2.5–2.6 percent.
The preservation of the key rate has occurred against growth of inflationary expectations of the population due to a sharp rise in prices for automobile fuel in may-June and the planned increase in value added tax (VAT) from 18% to 20%. In June, inflation expectations are accounted for 9.8% — highest since the autumn of last year. This noticeable growth in annual inflation in recent months was observed: from March to may, this index remained at 2.4% in June to 2.3%. In July, inflation expectations, the Central Bank has stabilised — this occurred along with cessation of growth in gasoline prices after the decision on reduction of excise duties on petroleum products.
CB does not change the level of the key rate for the third time in a row — the last time it was lowered by 0.25 percentage points in late March. This was the fifth consecutive decrease in level of rates — the regulator was hoping until the end of 2018 to complete the transition to a neutral monetary policy (assumes the key rate in the range of 6-7% closer to the upper boundary). However, in April, the Central Bank took a pause in the weakening of the ruble amid geopolitical tensions (April 6, the United States imposed against Russia new sanctions package), the Bank of Russia evaluated as a factor in more rapid approximation of the inflation target to 4%.
After the June meeting, the Central Bank and is changed the rhetoric. The main factor was the government’s proposed tax changes — 2019 VAT rate should increase from 18% to 20%. This boosts the inflation expectations of Russians and stimulates a quicker adjustment of prices, explained the head of the Central Bank Elvira Nabiullina. Because of this risk, which estimates the Central Bank has shifted to preinflation. In June, Nabiullina said that the transition to a neutral monetary policy is likely to take place only in 2019.
This meeting of the Board of Directors of the Central Bank became the first since leaving the post of Director of monetary policy Department, Bank of Russia Igor Dmitriev (held this position for the last five years, at the end of June decided to leave the Bank to pursue “personal projects”). The new head of the Department, who comes from “VTB the Capital” Alexey Zabotkin to his duties has not yet begun — the preparations for the meeting of the Board of Directors was led by the acting head of the Department, former Deputy Dmitriyev Andrey Lipin. After leaving Dmitriev, the Central Bank reported that monetary policy will remain unchanged.
Analysts before the meeting of the Central Bank were almost unanimous in saying that the key rate will not change. According to the 23 July, the consensus forecast of Reuters, all 20 surveyed economists predicted saving rates. In favor of the fact that the key rate will remain unchanged, spoke and 100% of respondents to the consensus forecast of Bloomberg.
“After the June tightening of the rhetoric over possible inflationary risks from the increase in VAT in 2019 bet with almost 100% probability will not change. Annual inflation will continue to slowly accelerate, and the growth of the economy is consistent with the underlying forecasts of the Central Bank, especially in terms of consumer demand. Coupled with continued external risks it allows the Central Bank did not change”, — wrote in his review chief economist of the Russian direct investment FUND Dmitry Polevoy.
The Central Bank decision was very predictable for the market, said the Director of analytical Department of “Loco-invest” Cyril Tremasov. Its release, the regulator, in fact, the previous confirmed signal that the rate this year, more will not be affected, he says. As for the inflation indicators, deflation is not expected because of the less plentiful harvest than last year. “Therefore, due to the low base effect of last year annual inflation will grow”, — said the expert. In September, inflation will be 3.5%, and at the end of the year will be within target of 4%, but in early 2019 we will see it above 4% due to the increase in VAT implies Tremasov.
As the market is almost 100% were confident that the Central Bank will keep the rate, accepted the decision of the neutral: no impact on the OFZ market and the rouble has not had a decision, says senior analyst BKS Sergey Suverov. Probably in 2019, the Central Bank will resume its decline, because annual inflation will be well below the key rate, he said.