The Bank of Russia for the first time since December 2014 has raised its key interest rate — it rose by 0.25 PP to 7.5%. In this case the regulator dramatically increased the inflation forecast to the end of 2019, it may be 5.5%
Photo: Ekaterina Kuzmina / RBC
The Bank of Russia following the meeting of the Board of Directors on 14 September decided to raise the key rate by 0.25 PP to 7.5%.
Simultaneously with the announcement of key rate of the Central Bank announced that it will extend the pause in the purchases of foreign currency for the Ministry of Finance in the budgetary rules until the end of December 2018 (previously the pause was planned to hold until end of September).
CB acknowledged that since the previous meeting of the Board of Directors of the regulator in June, the external conditions have changed that significantly increased the risks preinflation. The Bank of Russia sharply raised its forecast for inflation. If earlier it was assumed that by the end of 2018 inflation will be 3.5–4%, and in 2019 will temporarily exceed the target of 4%, returning to 4% in early 2020, but now by the end of 2018, the Central Bank expects the inflation at the level of 3.8–4.2 percent. In the first half of inflation, according to forecasts of the regulator, “peak”, and at the end of 2019 will be 5-5,5%. Annual inflation will return to 4% in the first half of 2020, predicts the Central Bank — by the time the effects of the weakening of the ruble and scheduled for early 2019 the increase in VAT will be exhausted.
In the release on the rate, the Central Bank said that “will assess the feasibility of further increasing the key rate, taking into account the inflation dynamics and Economics in relation to the forecast” and “given the risks from the external environment and the reaction of financial markets.”
The return of annual inflation to 4% is faster than expected, says CB. In addition, inflation expectations of households and enterprises increased against the background of exchange rate volatility. The reason for the weakening of the ruble, in turn, the outflow of capital due to “external conditions”.
The increase in the key rate will contribute to maintaining positive real interest rates on deposits, which will maintain the attractiveness of savings and the balance, says the regulator.
The ruble has appreciated sharply after the announcement of the rate increase and extension of the pause in the purchase of currency. At 13:28 GMT the dollar was trading at RUB 68,4, 14:08 reached 67,60. Euros to enhance rate cost 80 rubles., to 14:08 — 79,09.
The Central Bank decision is an “absolute right” is “a very important point to stabilize market sentiment and inflation risks decline,” said RBC head of the analytical Department of “Loco-invest” Cyril Tremasov — the only one of the analysts (according to the consensus forecast of Reuters), predicted an increase in rates. “Decision of the Central Bank are taken primarily through the prism of the impact on inflationary risks. It is good that the Central Bank recognized the danger of serious inflation,” said Tremasov.
However, the important factor remains the sanctions. “Right now Russian markets are in a bind, and any optimism comes upon the understanding that at any moment can be sanctions,” adds Tremasov. Further actions of the regulator will depend on the external situation by the time of the next meeting of the Central Bank, says the economist, a half months ago, a rate hike was unlikely.
Further actions of the Central Bank will be associated with the state of the market — today’s release of the regulator is not the answer as the Bank of Russia sees the long-term trajectory of rates, says chief economist at Alfa Bank Natalia Orlova. In fact, the Central Bank said that what we see in the market is not just short-term volatility, but a structural change of the markets, which will have an effect on inflation, the analyst said. Based on the fact that the Central Bank quickly launched a cycle of rate cuts, it would be logical to assume that the rate will continue to rise in the future. If the rate will remain at 7.5%, it would mean that the Central Bank succumbed to market panic, says Orlova. The strengthening of the ruble has little to do with the dynamics of the bet, and resulted from the suspension of currency purchase, she points out.
This is the first increase in the key rate of the Central Bank since December 2014. Then on the background of the collapse of the ruble against the dollar and the Euro, the Central Bank in one week raised the rate from 9.5 to 10.5% and then immediately to 17%.
Before today’s meeting, the Central Bank three times in a row kept the rate unchanged. In the July release, the regulator explained its decision by the fact that the balance of risks shifted in the direction preinflation. In addition, the Central Bank said uncertainty over external conditions and uncertainty as to the inflation expectations impact increase in value added tax at the beginning of 2019.
Since then, the situation on the markets has changed markedly. In August, the U.S. state Department announced plans to impose sanctions against Russia in connection with the case of the poisoning of the family Skrobala in the UK. In addition, was published the Senate’s bill to expand sanctions against Moscow. This triggered a mass exit of foreign investors from the Russian instruments. The average yield of government bonds of Russia (RGBI index) since the beginning of August has increased by 10 September from 7.68 to 9.1% (the highest since June 2016). The ruble was also updated more than two-year lows against the dollar and the Euro. On the background of the turbulence on the financial markets of the Central Bank until the end of September declined from purchases of foreign currency for the Ministry of Finance in the budgetary rules, the Ministry of Finance several times could not hold auctions for placement of OFZ.
However, in recent days, the Russian currency strengthened slightly and OFZ yields fell. As explained interviewed by RBC analysts, this was due to adjustments in the markets — Russian assets were clearly “oversold”.
On 4 September, Central Bank head Elvira Nabiullina acknowledged that the factors speaking in favor of a rate cut, a significant number of factors in favour of maintaining rates. At the same time, the head of the Central Bank noted that there are factors that allow you to “put on the table” the question of a possible rate hike. After the words of the head of the Central Bank from the government was followed by several statements not in favor of tightening monetary policy of the regulator. Prime Minister Dmitry Medvedev said that “we need to move from neutral to stimulating regulation of the sphere of lending”, and the presidential aide Andrei Belousov estimated the rate increase as “extremely desirable”, which will hamper investment activity and lead to additional budget expenditures.
The vast majority of analysts ahead of the announcement of key rate said she likely will not change. The Department of studies and forecasting of the Central Bank recognized that dynamics of rates on the Russian money market indicates that markets expect interest rates hike.