Bank of Russia Press release After the meeting, it announced its decision to immediately raise the interest rate to 12% in order to limit the risks to price stability. The regulator noted the growth of inflationary pressure in Russia. According to the Central Bank on August 7, the rate of price increase in the country rose to 4.4% year-on-year and continues to accelerate. In the last three months, seasonally adjusted annual inflation was 7.6% on an annual basis, while annual core inflation reached 7.1%. In addition, the fact that the demand in the domestic market exceeds the possibility of increasing production causes inflation to increase, affects the ruble exchange rate and raises the public’s expectations for further price increases.
The Central Bank noted that it will take further decisions on the key rate by evaluating the actual and expected dynamics of the rate of price increase relative to the target, the economic restructuring process, and the risks arising from internal and external conditions. and the response of financial markets to them. According to the regulator’s forecast, annual inflation will return to 4% in 2024, given continued monetary policy.
After a while, the Central Bank made an additional statement regarding the interest rate decision and allowed the interest rate to be increased further. This will be made possible by increasing pro-inflationary risks.
“The Central Bank of Russia will take further decisions on the key rate, depending on the extent to which the dynamics of actual and expected inflation to the target, the process of economic restructuring, risks arising from domestic and external conditions, and financial responses. According to them, the markets will be able to bring the risk of inflation upwards from the target closer to 4% in 2024. In case of increased pro-inflationary risks, there may be an additional increase in the key interest rate,” the Central Bank said.
what about rubles
Sovcombank chief analyst Mikhail Vasiliev noted that the current decision of the Central Bank on an extraordinary increase in a key rate is aimed at stabilizing the ruble exchange rate. After the announcement of the Central Bank’s decision, the ruble first strengthened, then fell after 20 minutes. According to the Moscow Stock Exchange, at 11:34 am Moscow time, the dollar is trading above 98 rubles and the euro at 107 rubles.
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The dollar rose to 100.5 rubles at auctions on the Moscow Stock Exchange on Monday. Since the beginning of the year, the dollar rate has increased by 40% from 70 rubles to 98 rubles. The euro rose 44% from 74 rubles to 107 rubles.
“The central bank did everything right. Only a strong reaction to the sheer decline of the ruble can stop the deception and speculative attack. 0.5-1 pp market will be perceived as a sign of weakness. The ruble has gained support and will likely return to 90 rubles per dollar as entry speculators who play aggressively against the national currency are unleashed.”
– BCS Mir Investments stockbroker, Economic Sciences Candidate Mikhail Zeltser commented.
According to him, at the current rate of 12%, the panic of the population will most likely stop.
Vasiliev expects the ruble to return to the range of 90-100 rubles per dollar by the end of the year. “In the baseline scenario, we include in our estimates for the third quarter the average exchange rate of the ruble against the dollar at the level of 93 rubles, for the 4th quarter – 95 rubles,” he said. According to Vasiliev, the strengthening of the ruble will help reduce the population’s demand for foreign exchange.
What about deposits and loans?
A changing key rate always affects deposit and loan rates in Russia. The higher the Central Bank interest rate, the higher the loan and deposit interest rates. Mikhail Zeltser explained that with the key rate, for example, an increase of 1 percent, rates on deposits and loans also grew by 1 percent or slightly higher.
According to Vasiliev, deposit rates will rise to approximately this level after raising the key rate to 12%. The increase in deposit rates and bond rates will increase the attractiveness of ruble savings and increase the demand for rubles.
“If the rate is high, it is profitable to open deposits, but it is not profitable to take out loans. In the near future, it will be more profitable to open deposits after the Central Bank interest rate hike, as the main credit institutions expect an additional flow of money from the population due to this, ”said the statement. Financial Control, Analysis and Audit of the Main Control Department of the Moscow City of the Russian University of Economics. GV Plekhanov Dmitry Osyanin.
Vasiliev noted that since the increase in the basic interest rate is already partially included in the loan rates, loan interest rates may increase by a smaller amount. Mortgage rates can add 1 more point, he said. The expert agreed that the increase in credit costs will reduce consumer and investment demand.
Ovsyanin added that with the increase of the key rate, it becomes less profitable to take out a mortgage or any loan due to the higher interest rates.
“Demand for loan products, which was at a record level in the second quarter of 2023, should decrease. As for preferential mortgages and loans, an increase in the key rate means an increase in budget expenditures to subsidize rates for such loan products,” the expert summarized.
What does the Central Bank’s signal mean?
According to Vasiliev, the key rate will remain at the current 12% level until the end of the year. According to him, the Central Bank removed its ready signal to raise the rate in the future.
“We maintain our year-end inflation forecast at 7.5 percent. He believes a significant rate cut cycle is possible as early as next year when inflation begins to slow.
According to Vasiliev, at extraordinary meetings, the Central Bank, as a rule, takes great steps to increase the rate. In December 2014, the Central Bank increased the rate by 6.5 points from 10.5% to 17% at its extraordinary meeting. In February 2022, the Central Bank increased the rate by 10.5 points from 9.5% to 20% at an extraordinary meeting.
“There are no more threats like in 2014 or 2022, so the incremental step was smaller,” the expert said.
According to Vasiliev, the Central Bank wanted to give two signals to the market with its extraordinary meeting on interest. First, the authorities do not want the ruble to weaken rapidly above 100 rubles per dollar. Second, the authorities can use other means to protect the Russian currency besides raising the interest rate. According to him, if necessary, authorities can increase yuan sales from reserves, tighten restrictions on capital outflows, and return the forced sale of exporters’ foreign exchange earnings.
Seltzer agrees with him. The expert stated that in this case, the money supply will increase and the demand will decrease and the ruble will strengthen.
A weak ruble, according to Osyanin, complicates the development of the country’s economy and affects the real incomes of the population. Therefore, he believes that the ruble should be strong for the Russian economy, in the interests of the state, and that the exchange rate decision of the Central Bank in the future will help support the ruble.
Source: Gazeta
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