The Central Bank announced its decision to increase interest rates with high rates of current inflation. The regulator revised its price increase forecast in Russia for this year. According to the Central Bank’s forecasts, annual inflation will be in the range of 7-7.5% in 2023, instead of the previously expected 6-7%.
In the press release it made after the board meeting, the Central Bank stated that “Considering the ongoing monetary policy, annual inflation will decrease to 4-4.5 percent in 2024 and will remain close to 4 percent in the future.”
Previously, the regulator expected price growth to slow to 4% next year.
The current monthly inflation rate guided by the Bank of Russia remains significantly above the 4% target for the fifth month in a row. The Central Bank estimated the current pace at 14.6% in September, following 9.4% in August and 12.3% in July. Sovcombank chief analyst Mikhail Vasiliev predicted in October that the current inflation rate will again be above 10%.
“The Bank of Russia has confirmed its intention to return inflation to target levels by the end of 2024. Therefore, the Central Bank now needs to continue to act harshly. “Interest rate decisions affect inflation with a delay of 3 to 6 quarters,” he said.
Vasiliev added that through a higher interest rate, the Central Bank aims to cool rapid lending and reduce high demand in the economy in order to slow down the increase in consumer prices and return inflation to the target.
At the same time, the analyst thinks that a return to the 4 percent target is unlikely to occur before 2025. In the basic scenario for the end of this year, Vasiliev expects inflation to rise to 7.5 percent and slow down to 5.5 percent by the end of 2024.
What will happen to the ruble exchange rate?
Following the Central Bank’s decision, the ruble exchange rate strengthened sharply against the dollar and euro. Currently, the exchange rate of the American currency has fallen below 93 rubles, and the European currency – 98 rubles. According to the Moscow Stock Exchange, the cost of the dollar at 14:50 Moscow time is 92.74 rubles, while the euro is 97.72 rubles.
Vasiliev believes that the decision of the Central Bank will have a moderately positive impact on the ruble exchange rate in the coming days.
“In general, the impact of the key interest rate on the ruble has become longer and more indirect due to the absence of non-residents, Western sanctions and restrictions on capital movements,” he said.
The analyst expects the dollar exchange rate to remain in the range of 90-100 rubles. By the end of 2023, the American currency will cost 94-98 rubles, the euro will cost 99-104 rubles, and the yuan will cost 12.8-13.4 rubles.
What will happen to deposit and loan interest rates?
According to Vasilyev, after a 200 basis point or 2 percentage point increase in the key interest rate, banks will increase interest rates on deposits and loans, including mortgages.
“Deposit interest rates may rise to the key interest rate of 15 percent. Therefore, Russians will have the opportunity to invest their savings at a good interest rate. Inflation will peak at just over 8 percent in the middle of next year and fall to 5.5 percent by the end of 2024. Therefore, the real return on investment this year is expected to be quite positive. “The demand for ruble savings and the ruble will increase,” he said.
At the same time, loans will become less attractive for Russians and the number of applications for them may decrease.
You may still have time to take out a loan at “old” interest rates and open deposits with increased interest in the near future after banks update their offers. It is not worth investing in foreign currency, as the ruble exchange rate will strengthen after the Central Bank’s decision. And the profitability on ruble deposits will be significantly higher than on foreign currency deposits,” advised Denis Perepelitsa, director of the Federal Financial Literacy Methodological Center, Associate Professor of the Department of Global Financial Markets and Fintech at the Russian University of Economics GV Plekhanova.
If there is no urgent need, you can wait with a new expensive loan – interest rates may be lower in 2024, adds Mikhail Zeltser, Candidate of Economic Sciences, stock market expert at BCS World of Investments.
Depositors and borrowers in general should be prepared for the fact that the key interest rate could remain in double digits throughout 2024 and possibly part of 2025, experts say.
What happens next with the key interest rate?
The Bank of Russia has lifted the signal that it is ready to raise interest rates in the coming meetings. However, the Central Bank increased its forecast for the average interest rate this year; The figure is expected to be in the range of 15-15.2% by the end of the year. The average key interest rate forecast for 2024 was increased by another 100-200 basis points to 12.5-14.5%.
“Considering that the Central Bank’s year-end inflation forecast is 7-7.5 percent and our forecast is 7.5 percent, and the average key interest rate forecasts are taken into account, we expect interest rates to increase at the next meeting on December 15. Vasiliev noted that the Central Bank of Russia will increase the key interest rate by another 50 basis points to 15.5%.
According to him, in the base scenario, the 15.5% level will be the peak of the key interest rate in the current increase cycle.
The opportunity to reduce the interest rate will open only in the middle of next year, when inflation begins to slow down. In the base scenario, analysts expect inflation to slow to 5.5 percent by the end of 2024 and the key interest rate to be reduced to 10 percent.
Vasiliev believes that in a risk scenario the key interest rate could be increased to 17-20%. The risk scenario assumes that the ruble exchange rate will continue to weaken towards 110 rubles per dollar or that inflation will accelerate above expectations, reaching 10% at its peak in the first half of 2024.
The Central Bank increased the interest rate to a record level of 20% annually in March 2022 in the face of anti-Russian sanctions.