Increasing price increase rates
Sovcombank chief analyst Mikhail Vasiliev stated that when making decisions, the Central Bank will primarily focus on the level of price increases.
Inflation is currently above the Central Bank’s year-end forecast of 7-7.5%. According to Rosstat, the price increase rate from the beginning of the year until December 4 was as follows: 6.8%. According to the Ministry of Economic Development, annual inflation has been exceeded by this date 7.5%.
Vasiliev said, “Analysts expect inflation to be 7.6% at the end of the year, and we expect the price increase to rise to 7.8%.”
He explained that prices will reflect the weakening of the ruble exchange rate since the beginning of the year. (Dollar rose 32% year to date)It also has a record low unemployment rate 2.9%Rising inflation expectations in 2024 and maintaining a relatively loose fiscal policy.
Strengthening pro-inflationary factors
In addition, factors that trigger inflation are also increasing (various conditions and events that contribute to the growth of inflation in the economy).
“The labor market remains extremely tight and staff shortages are increasing. Unemployment reached another historic low in October. We do not expect the labor market to improve in the coming quarters. Due to personnel shortages, salaries are growing rapidly and outpacing labor productivity,” Vasiliev said.
According to Rosstat, Salaries increased in September Open 7.2% literally and 13.6% in a nominal sense.
According to the Central Bank, Population’s inflation expectation increased in November before 12.2% Inflation observed at 11.2% in October 15.1% It was at 13.9% in October.
The third factor in favor of increasing the interest rate is The risk of weakening the ruble continues.
“Since the last meeting of the Central Bank in October, the ruble has strengthened from 93 rubles to 91 rubles per dollar, but during this period oil prices of the benchmark North Sea Brent brand fell by 16% from 90 dollars to 75 dollars per barrel. Among the positive aspects, the stabilization of the exchange rate can be noted in the range of 90-95 rubles per dollar. “This happened thanks to the reintroduction of compulsory sales of foreign exchange earnings of the largest exporters,” explains the analyst.
Fourth, Loan interest rates continued to slow down in November. Loans to individuals decreased in November, according to open tracking data from analytical firm Frank RG 10.5% As of October, there was a contraction in all credit segments.
Central Bank will discuss options such as a sharper increase 17%BCS Forex analyst Anatoly Trifonov says that the rate should be maintained at the current level.
“If the Russian Central Bank fears possible risks to economic growth, keeping the interest rate at 15% could be an option. The decision will depend on the assessment of inflation and economic indicators,” said Alexander Shneiderman, head of sales and customer support department at Alfa-Forex.
How will the ruble react?
The reaction of the ruble exchange rate will depend on how financial markets evaluate the Central Bank’s decision.
“There may be pressure on the ruble in the short term, but in the long term the ruble may strengthen if interest rate hikes alleviate inflation concerns,” Shneiderman thinks.
Vasiliev does not expect the ruble exchange rate to react immediately to the increase in the key rate, as its impact on the currency becomes longer and more indirect after the introduction of Western sanctions and currency restrictions in 2022:
“The more the Russian Central Bank increases the interest rate, the stronger the support for the ruble will be. “However, it takes a few months for this factor to fully materialize in the economy,” he said.
BitRiver financial analyst Vladislav Antonov did not rule out strengthening the ruble exchange rate by 15-20 kopecks after the decision of the Central Bank.
“Increasing the key interest rate to 17% could strengthen the ruble exchange rate, currently to 89.7 rubles per dollar. However, you should not expect a significant increase in the ruble exchange rate. It will most likely be close to current values. (90.3 rubles per dollar and 97.5 rubles per euro. – socialbites.ca). Investors have established a trading range of 87.70 – 102 rubles per dollar for the first quarter of 2024. 89.40 rubles per dollar is a strong level. Antonov predicts that if this situation does not continue, the market will continue to look for the lower limit of the corridor.
He added that as exporters continue to have obligations to sell their revenues and oil prices rise, the lower end of the range may fall to: 86 rubles for a dollar.
“Fluctuations in the ruble exchange rate after the Central Bank meeting are, as a rule, short-term – one trading day, and this volatility is unlikely to exceed 0.5%,” says BCS Forex analyst Trifonov.
Vasiliev explains that the increase in the key interest rate will lead to: increase in credit costIt will reduce consumer and investment demand, including imports, and reduce the demand for money:
“Deposit interest rates will increase. This will increase the attractiveness of ruble savings and increase the demand for the ruble. “We think that in December the dollar will cost 88-93 rubles, the euro will cost 94-99 rubles, and the yuan will cost 12.2-12.9 rubles.”
What will happen next
According to Vasiliev’s predictions, in the base scenario, the key interest rate increase in December will be the last increase in this cycle.
“The Central Bank now needs to continue its tough rhetoric to convince market participants that higher interest rates are here to stay.
“This will strengthen the transmission of the Central Bank’s decisions on key interest rates to interest rates in the economy and prevent premature loosening of financial conditions,” he said.
He suggested that the opportunity to cut the interest rate would only open up in mid-2024, when inflation begins to slow. In the base scenario, it expects this rate to slow down to 6 percent by the end of 2024 and the key interest rate to fall to 12 percent.