Why did the central bank cut interest rates?
On June 10, at a Board meeting, the Bank of Russia decided to lower the key rate by 1.5 percentage point(s) to 9.5 percent per annum.
“Recent data point to low current price growth rates in May and early June. This was facilitated by the dynamics of the ruble exchange rate and the exhaustion of the effects of rapid consumer demand. “This is happening in the context of a noticeable drop in inflationary expectations of the population and businesses,” he said. announced editor’s decision.
According to the Central Bank, annual inflation was 10% in June compared to 17.8% in April. The Central Bank estimates annual inflation at 14-17% by the end of 2022. Important factors should be import substitution and restoration of imports of finished goods and raw materials. In addition, the Central Bank believes that the price increase will decrease to 5-7% in 2023 and return to 4% in 2024.
Alina Dzhus/socialbites.ca
At the same time, the rhetoric of the Central Bank of Russia became tougher. The regulator said it would take additional steps to lower the rate, taking into account the move towards a target inflation of 4%.
“The Central Bank will take additional decisions on the key rate, taking into account the actual and expected inflation dynamics, according to the 4% target, which is the process of economic restructuring. In addition, assessing the risks arising from internal and external conditions and the response of financial markets to them. “The Russian Central Bank will evaluate the feasibility of lowering the key interest rate at subsequent meetings,” he said.
How did the Central Bank change the interest rate?
In 2021, the Central Bank increased the rate eight times in a row. Last March, that figure was 4.25% year-on-year and then gradually increased. On February 11, 2022, the regulator immediately increased the indicator by 1 point, to 9.5%, the maximum since spring 2017. On February 28, the regulator immediately increased it to 20% against the backdrop of the sanctions. The increase in the ratio to this value was a historical maximum against the backdrop of the collapse of the ruble after the start of special operations in Ukraine. When the dollar rose above 84 rubles, trading on the stock market was stopped. Prior to that, the annual rate of 17%, set in December 2014, was considered a record.
“External conditions for the Russian economy have changed significantly,” the Central Bank later said of its decision. An increase in the key interest rate should enable deposit yields to rise to levels that make it possible to offset the increased risks of devaluation and inflation. “This will help maintain financial and price stability and protect citizens’ savings from depreciation,” the Central Bank said.
On March 18, the rate was kept at 20% per annum. Then the downward cycle began. On April 10, the Central Bank reduced the rate to 17% annually and to 14% on April 29. On May 26, this figure was unplanned and was reduced to 11% per year. Now, the rate has returned to the level of February 11 with 9.5%.
Igor Rapokhin, senior debt market strategist at SberCIB Investment Research, attributed the key rate cut cycle to the slowdown in inflation and the inflationary expectations of the population and the strengthening of the ruble.
After the interest rate cut, there was a decrease in deposit and loan rates. Deposits now go up to 9.5% per year, while consumer loans cost an average of 12.5% per year. They fell from 20% and 30% respectively in the February-March period – then banks increased their rates to 20% as the 1% rose.
Mortgage rates have now dropped from 18-20% per year to 11-12%. Including discounted rates on preferential mortgages. In March, the government-backed mortgage rate was 7% per annum, the conditions for this were adjusted only from April 1 – the rate was increased to 12% and the program was extended until the end of the year. Subsequently, the rate on such a mortgage was reduced to 9% from May 1.
What does the current rate cut mean and what will it lead to?
According to the Moscow Stock Exchange, at 15:00 Moscow time on June 10, the dollar is trading at 56.37 rubles, the euro – 59.56 rubles. Thus, the forecast of the weak impact of the Central Bank decision on the national currency was confirmed: on June 9, economists and financiers declaration “socialbites.ca” states that even the decrease in key rate is 2 pp. It will not cause jumps in US and European currencies.
“The rate flip was expected to happen – the emergency takeoff from 9.5% to 20% ended with a descent to 9.5% just 3.5 months after the known events,” said Mikhail Zeltser, BCS World of Investments expert. .
In his view, the purpose of the February rate hike was to stop the currency panic and the escape of depositors from the banking system.
“Totally complete. And the return of the cost of funding to pre-crisis levels is associated with a decline in inflationary expectations, weekly price deflation, a decline in borrowers’ lending activity, a collapse in consumer confidence and a record strengthening of the ruble by historical standards. Zeltser commented.
Until the next meeting to be held on July 22, it is likely that the Central Bank will closely monitor the impact of interest rate cuts on financial markets before continuing the loosening in monetary policy without delay. However, Zeltser sees potential for a lower rate even now than the Central Bank.
“The effect of the Central Bank interest on financial assets will be different. For bank deposits, a drop in federal interest is a signal for further declines in yields. Even now you can’t find a double-digit percentage of deposits in the top 10 banks. Obviously, rates will drop below 9% in the coming weeks. Lending rates are also not going anywhere and will continue to fall. True, there is one nuance – on the basis of the general decrease in the cost of funding, credit institutions are not in such a hurry to reduce the cost of loans,” said Zeltser.
what will happen to the stock market
According to him, stocks are now becoming an alternative to deposits and bonds, which still haven’t recovered after February’s turmoil.
The Central Bank’s interest rate cut for stocks is a positive medium-term factor. And once investors start to recapture that, securities from industries focused on the domestic market will likely have an advantage: consumer sector companies, banking stocks, telecommunications and the electric power industry,” Zeltser said.
In his opinion, the decision of the Central Bank in general should limit the trend towards the strengthening of the ruble.
“However, the export-import context still prevails. Against the backdrop of heavy foreign exchange supply from exporters and simultaneous import failure, it is not necessary to expect a rapid recovery of the dollar and euro from multi-year lows. However, in the medium term, there is a risk of shrinking exports due to the increased risks of the Western embargo. Against the background of the removal of pandemic barriers in China, imports may intensify. Apparently, it will be at the expense of the PRC that they will have to make up for the shortage of goods until the import substitution process reaches the necessary pace for the domestic market. Zeltser believes that the benchmark for the second half of the year is the dollar’s return to 70 rubles.
Source: Gazeta
Barbara Dickson is a seasoned writer for “Social Bites”. She keeps readers informed on the latest news and trends, providing in-depth coverage and analysis on a variety of topics.