The Central Bank cut the interest rate by 3 percentage points to 17% annually. This decision was taken by the organizer following the Board of Directors meeting on 8 April. The new rate will be effective from Monday, April 11th.
The Central Bank of Russia announced its decision by easing some adverse conditions affecting the rigidity of monetary policy. How should Risks to financial stability remain, but growth has stalled, including measures to control capital movement, according to a press release from the Central Bank. The regulator fixes a stable inflow of money into time deposits.
“Annual inflation will continue to rise due to the base effect, but the latest weekly data point to a significant slowdown in current price increases. Included due to the dynamics of change course rubles,” the Central Bank explained.
The Central Bank of Russia announced that the decision to cut interest rates reflects a change in the balance of risks to financial stability, accelerating consumer price increase, slowdown in economic activity and financial stability.
“The Central Bank will make further decisions on the key ratio by assessing the risks arising from external and domestic conditions, the response of financial markets to them, and considering the actual and expected inflation dynamics, economic development and economic development relative to the target. It acknowledges the forecast horizon and the possibility of continuing to lower the key rate in the upcoming meetings,” comes after a press release from the regulator.
sensible decision
Over the past year, the Bank of Russia has gradually increased the rate – a total of 4.25 percentage points. At the beginning of 2022, it reached 9.5 percent annually after the next revision. Then the regulator immediately increased it to 20% per annum on the background of sanctions. On March 18, the exchange rate was kept at this level.
“On the one hand, the Central Bank’s decision is unexpected. Many assumed that the regulator would wait until the official meeting on April 29 to cut the rate. But on the other hand, it’s quite natural. The USD/RUB exchange rate is down 40% from highs. This will significantly dampen the inflationary momentum observed for four consecutive weeks – the consumer price index is falling. Besides, the bank run is long over. By the end of February, cash withdrawn by the public largely returned to the banking sector. “There are no problems with liquidity to stop the outflow from banks,” said Vasily Karpunin, head of the information and analytical content department of BCS World of Investments.
Oleg Syrovatkin, a leading analyst in Otkritie Investments’ global research department, described the Central Bank’s decision as logical.
“Current conditions – the almost complete restriction of the export of capital and the obligation of exporters to sell 80% of their foreign currency income – provoked a net inflow of foreign currency into Russia. In exchange for this currency, a large amount of ruble liquidity enters the country’s financial system, which will serve to lower interest rates on both loans and deposits. Against this background, and given the significant strengthening of the ruble, it seems a very logical decision for the Central Bank of Russia to cut its key interest rate.
What will be the consequences for the market and the ruble?
According to Karpunin, bonds were trading at much lower yields by issuing mortgages prior to such a decision by the Central Bank, so they could only rise marginally.
The rate cut for the ruble is a negative factor. However, it is now primarily affected by the trade surplus: the volume of sales of export revenues significantly exceeds the demand for foreign currency from importers. In order to stop the strengthening phase of the ruble, it is necessary to soften the exchange rate control measures,” he said. According to him, the rate cut is a positive driver for the Russian stock market.
Deposit rates will drop on loans – not immediately
According to Karpunin, deposit rates began to fall even before the Central Bank’s decision.
“Some credit institutions dropped 3-5 percentage points from the maximum values at the beginning of March. That is, they have already priced in this factor as they do not need much liquidity. In the near future, deposit rates will continue to decline after the slowdown in inflation. The probability of this is very high.
Therefore, those who want to open deposits should hurry and fix the rates until they change very soon. “Loan rates will react a little longer, but may drop after the base rate,” he said.
Vladimir Teterin, senior director of banking ratings at Expert RA, agrees.
“The sharp increase in the key interest rate in February followed by the increase in deposit offers stopped the panic of depositors. In March, many banks began to adjust their deposit yield downwards in an effort to limit the entry of expensive deposits. Now that the key rate has been lowered, this trend will continue both for deposits over a period of several months and for longer term instruments. In terms of lending, improving conditions for the population may be more cautious here. In the absence of prerequisites for increasing citizens’ income, the risks of bankruptcy remain high, ”explained Teterin.
Karpunin did not rule out the possibility of further cuts in the Central Bank’s key interest rate.
“At least, the beginning of the trend to lower the rate is encouraging. By the end of April, the regulator is likely to reduce the rate again, for example to 15-16% per annum,” Karpunin said.