Central Bank announced Press release He bases this decision on the fact that the current inflationary pressure remains high, although it is gradually weakening.
“Domestic demand continues to significantly exceed opportunities to expand production of goods and services. Tightness in the labor market increased again. It is too early to judge whether disinflationary trends will accelerate further. The regulator emphasized that the monetary policy followed by the Bank of Russia will consolidate the process of combating inflation in the economy.
Last year, the Central Bank increased the interest rate five consecutive times, from July 21 to December 15 to 16% annually.. It was held at this level on February 16. The next meeting of the Central Bank will be held on April 26. The regulator will publish the press release about the decision on its website at 13:30 Moscow time.
“We need to act tough”
Candidate of Economic Sciences Mikhail Zeltser, stock market expert at BCS World of Investments, thinks that the regulator’s decision is absolutely justified:
“On the one hand, the price pressure in the economy and the inflation expectations of Russians and companies are decreasing, albeit slowly. However, on the other hand, the slowdown in price increases, the pressure on the labor market and the supply-demand imbalance of goods and services still do not allow the regulatory authority to make decisions on changing the monetary policy cycle. .”
Sovcombank chief analyst Mikhail Vasiliev noted the Central Bank’s signal in a press release after the interest rate decision, leaving the regulator the opportunity to act on the incoming data.
“In December-February, seasonally adjusted inflation slowed down compared to the autumn months, but it is still well above the 4 percent target. Therefore, the Central Bank will probably continue to maintain the current high rate of 16 percent until it is sure that there will be a sustainable decline in inflation and inflation expectations,” Vasiliev said.
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According to him, there is still a risk that inflation will remain high for a long time. These include personnel shortages in the labor market, uncertainty in geopolitics and the ruble exchange rate, rising inflation expectations, deviation of the economy from the balanced growth path and risks of widening the budget deficit.
“The Bank of Russia has confirmed its intention to return inflation to its 4% target by the end of the year. “For this reason, the Central Bank needs to continue to act harshly because interest rate decisions affect inflation with a delay of 3 to 6 quarters,” he emphasized.
He added that due to the high interest rate, the Central Bank of Russia is trying 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.
What will happen to deposits?
Deposit interest rates depend on the Central Bank interest rate. (when the regulator increases the key interest rate by, say, 1 percentage point, deposit rates also increase). Keeping this rate at 16% will not have a noticeable impact on banking products. Interest rates on deposits are currently at a high level, but only for a short period of time – you can deposit money at 14-15% per annum for three months. In some cases, banks offer 16 percent for six to seven months. Rates are lower on long-term deposits.
“Deposit returns are sensitive to the Central Bank interest rates. In December 2023, the Central Bank increased the rate to 16% and deposit returns rose rapidly, reflecting general market trends. However, the average maximum rate at the top 10 banks peaked at 14.9 percent in January 2024 and has not increased since then, averaging 14.85 percent at the beginning of March,” Zeltser said.
He admitted that banks were preparing to reduce interest rates. Without any force majeure, the peak in deposit interest rates in banks has probably passed.
According to the 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 said that the current level of deposit interest rates will remain the same in the near future.
Doctor of Economic Sciences Yuri Shedko, Professor of the Department of State and Municipal Administration at the Financial University of the Government of the Russian Federation, suggested that the population’s demand for deposits and bank deposit rates will remain at the same level. Vasiliev believes that deposit interest rates may fall to 10-12% by the end of the year.
What about loans?
The higher the key rate, the more expensive credit is for businesses and households. 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. While the prime interest rate remains unchanged, there is little change in loan interest rates. Currently, rates on consumer loans are 13.5-14.5%, and rates on mortgages are 16-17%, in some cases reaching 25%.
Vasiliev warned that savers and borrowers in general should be prepared for the fact that this period of tight monetary policy could be long and the key interest rate could remain at double-digit levels throughout 2024 and possibly part of 2025.
According to him, consumer loans and mortgage rates will remain close to current high levels in the coming months.
“Perhaps Russians will postpone applications for consumer loans and mortgage loans until the end of 2024. Shedko also noted that the demand for vehicle loans may increase significantly in 2024, including the effective marketing policies of manufacturers and dealers.
What will happen to the ruble exchange rate?
A high interest rate slows lending and reduces demand for imports and 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.
Vasiliev explained that the decision of the Central Bank coincides with the expectations of the financial market and therefore will not have a significant impact on the ruble exchange rate at the moment. In general, keeping the key interest rate at a high level of 16% in the coming months will continue to support the ruble, along with the forced sale of foreign exchange earnings, the expert said. In the coming weeks, the dollar will cost 90-95 rubles, the euro 98-103 rubles, and the yuan 12.4-13.1 rubles.
According to Shedko’s estimate, the dollar will cost 92−95 rubles and the euro will cost 101−103 rubles.
“Since May, foreign exchange demand has been increasing, including import purchases, foreign debt payments and tourist trips. The economist stated that the factors limiting the ruble are geopolitical and sanction risks.
Perepelitsa added that the ruble exchange rate will not undergo a noticeable change, but there is a possibility that the ruble will strengthen up to 89 rubles by the summer. for a dollar.
What will the prices be?
According to Perepelitsa, prices in Russia will remain at current levels and no increase in inflation is expected. Inflation in the consumer market slowed to 0.09% in the week between February 27 and March 4, but the annual price increase rate was 7.59% compared to 7.58% in the previous week.
The economist stated that there is no point in waiting for inflation to drop to 4 percent this year, and that inflation will most likely be around 5.2 percent at the end of the year.
Vasiliev also noted that inflation is unlikely to return to the 4 percent target before 2025. According to their forecasts, annual inflation in the Russian Federation will reach its peak this July at 8.3% (after increasing tariffs on housing and communal services by almost 10%) and will slow down to 6% by the end of this year.
What is expected from the Central Bank next?
According to Zeltser, at the next meeting on April 26, the interest rate will remain at 16 percent for the third time and the Central Bank will start reducing interest rates before June. Perepelitsa agrees that the key interest rate may be revised downwards as inflation factors decrease in the summer months.
In the baseline scenario, Vasiliev expects the key interest rate to be reduced to 12% by the end of the year. In the risk scenario, the analyst allowed the key interest rate to rise to 17% in the coming months if inflation does not slow.
“If the growth trend in pro-inflationary risks and inflation expectations continues due to the ongoing boom in consumer loans, it is possible for the rate to rise to 17%,” Shedko said.
What are you thinking?
Source: Gazeta
Ben Stock is a business analyst and writer for “Social Bites”. He offers insightful articles on the latest business news and developments, providing readers with a comprehensive understanding of the business world.