The Central Bank announced its decision by saying that the current inflation pressure has decreased compared to the autumn months of 2023, but remains high.
“Domestic demand continues to significantly exceed opportunities to expand production of goods and services. It is too early to judge the sustainability of the emerging disinflationary trends. The regulator stated that the monetary policy followed by the Central Bank of Russia will consolidate the process of combating inflation in the economy. Press release.
According to the Central Bank, current seasonally adjusted price growth on average for December 2023 to January 2024 fell to 6.6% on an annual basis (compared to 11.5% in the autumn months). The same core inflation rate fell to 7% on an annual basis (compared to 10.2% in the autumn months).
“This largely reflects the increasing effects of tightening monetary policy. “The annual inflation rate is close to December 2023 levels due to the base effect and is at 7.4 percent as of February 12, according to estimates.”
compromise solution
Analysts evaluated the Central Bank’s decision on interest rates as expected corresponded Forecasts of financial market participants.
“Inflation slowed down in December-January compared to the autumn months, but it is still significantly above the 4 percent target. Therefore, the Central Bank will probably continue to maintain the current high rate of 16% until it is sure that there will be a sustainable decline in inflation and inflation expectations,” said Mikhail Vasiliev, chief analyst at Sovcombank.
He added that there are still risks that inflation may remain high for a long time. This may be facilitated by personnel shortages in the labor market, uncertainty in the ruble exchange rate and rising inflation expectations.
According to the expert, due to the high interest rate, the Bank of Russia aims to cool still high loans and reduce excessive demand in the economy in order to slow down the increase in consumer prices and return inflation to the target level.
At the same time, Vasiliev thinks it is unlikely that inflation will return to the 4 percent target before 2025. According to his forecast, it will peak at 8.4% in July (after the increase in tariffs for housing and communal services) and slow down to 6% by the end of the year. The analyst also announced that the risks are shifting more towards high inflation.
Candidate of Economic Sciences, Associate Professor at the Department of Global Financial Markets and Fintech at the Russian University of Economics. GV Plekhanov Denis Perepelitsa added that the Central Bank tries to prevent the risk of rising prices in Russia when deciding on the key interest rate. The economist described the decision as a compromise between the need to control the rate of price growth and the need to maintain business credit opportunities.
What is expected from the Central Bank next?
Overall, the Bank of Russia’s rhetoric has softened somewhat compared to the previous meeting on December 15, when the key interest rate was raised by 100 basis points to 16%. The Central Bank’s current signal reflects the slowdown in inflation and the falling public’s inflation expectations. The Central Bank maintained its statement that tight monetary conditions would be maintained. At the same time, the regulator raised its average key rate forecast for 2024 to 13.5-15.5% from 12.5-14.5%.
“This is consistent with our expectations for the average key interest rate this year, which averaged 15.1%,” Vasiliev said.
Due to the stability of the ruble exchange rate and tight monetary conditions, the growth rate of consumer prices will continue to slow down in the coming months. Therefore, analysts think: At the next meeting on March 22, the Bank of Russia will keep the interest rate at the current level of 16% and will reduce it only in the third quarter.
In the baseline scenario, Vasiliev expects the key interest rate to be reduced to 12% by the end of the year.
What will happen to the ruble exchange rate?
The decision of the Central Bank generally coincided with market expectations and therefore will not have a significant impact on the ruble exchange rate at the moment. Overall, keeping the key interest rate at a high level of 16% will continue to support the local currency in the coming months. Tight monetary policy slows lending and reduces demand for imports and demand for foreign currency (dollar and euro exchange rates fall when this happens). In addition, current high rates of 14-16% per annum on ruble deposits contribute to the attractiveness of ruble-denominated savings. This pushes the ruble exchange rate up.
Doctor of Economic Sciences, Professor of the Department of State and Municipal Administration of the Financial University of the Government of the Russian Federation Yuri Shedko added that the exchange rate of the ruble against the dollar and the euro will be affected by the need to sell foreign currency. by exporters due to upcoming tax payments, forced sale of part of exporters’ foreign exchange earnings and inflationary expectations of Russians.
“The ruble exchange rate against the dollar and the euro in March will remain at the same level at 90-92 rubles per dollar and 98-99 rubles per euro. It is better to buy foreign currency just before the trip,” the economist said.
What will happen to deposit interest rates?
Deposit interest rates depend on the interest rate of the Central Bank. When the Bank of Russia increases the key interest rate by, for example, 1 percentage point, deposit interest rates also increase. Keeping the key interest rate at 16 percent will not have a significant impact on banking products.
“Overall, the decision to keep the interest rate unchanged is a consensus in the market and is already incorporated into banking products and asset prices on the stock market. “Savers should be prepared for the fact that this period of tight monetary policy may last a long time and the key interest rate may remain in double digits throughout 2024 and possibly part of 2025,” Vasiliev warned.
This means that high deposit interest rates will remain close to current 14-16% levels during this period.
At the same time, experts expect a gradual moderate decline in deposit rates in the coming months, as inflation slows down further and expectations for a significant interest rate cut increase in the summer and autumn. According to Vasilyev’s estimates, deposit interest rates may drop to 10-12 percent by the end of 2024.
Shedko is confident that deposit rates will remain almost unchanged:
“Depending on the maturity, we can assume the following average rates in March: for three and six months – 15 – 16% per annum; – 14 – 15% for one year. If you have enough money, you can open a deposit on February 16 by choosing the most suitable option in terms of maturity and interest rate.”
What will be the loan interest rates?
The higher the key rate, the more expensive credit is for businesses and households. For example, when the Bank of Russia increases its key interest rate, loan interest rates also increase. Sometimes banks increase interest rates in advance in anticipation of changes in Central Bank interest rates. The increase in the cost of credit causes a decrease in commercial activities in the country and a decrease in the efficiency of business processes.
According to Shedko, after the Central Bank’s decision on February 16, average interest rates in cash loans will be 25 percent, and market interest rates in housing loans, excluding privileged programs, will be 17 percent. In the vehicle loan segment, rates will range from 18% to 25%. Loan interest rates started to rise and reached these levels after the policy rate was increased by 100 basis points to 16% on December 15.