Three experts, including former deputy chairman of the Central Bank Sergei Dubinin, predicted that the key interest rate would remain at 18%. Four economists and financiers spoke in favor of raising the interest rate to 19-20%.
Sovcombank chief analyst Mikhail Vasiliev told socialbites.ca that he sees: three main scenarios that he considered equally likely:
*Keeping the base interest rate at 18% in September and increasing it to 20% in October,
*The interest rate was increased to 19% in September and 20% in October,
- It will raise the interest rate to 20% in September and keep it at that level in October.
Why can the Central Bank maintain the interest rate?
The scenario of further interest rate hikes carries many risks, Ilya Fedorov, chief economist of BCS World of Investments, told socialbites.ca. In particular, if something suddenly breaks down in the financial system and the ensuing economic slowdown turns into a recession, it is possible to put pressure on the Russian economy and then start rapidly reducing interest rates, the economist explained.
Fedorov noted that the economy responds more slowly to an increase in the key interest rate than to a decrease.
“It is advisable to change the interest rate after understanding the budget parameters for 2025 and the amount of interest subsidies. The budget will not be officially announced until October. Breaks between the Central Bank meetings are insignificant. It makes sense to postpone the issue of changing the interest rate until October, when the budget parameters will allow us to assess the level of monetary policy tightness required for next year,” he said.
Fedorov also recalled that the regulator’s forecast will be updated in October based on data for July-September 2024. In addition, the reduction of concessional mortgage lending programs will allow further tightening of monetary policy without increasing interest rates. He already sees this process according to July data. Concessional mortgages have been reduced by almost four times, and unsecured loans have also been withdrawn.
“Manipulation after key interest rate was increased to 16 percent December 15, 2023It was revealed that a 1-2 point increase or decrease did not cause a change in inflation trends. In other words, this has no regulatory effect on inflation. After the rate was increased to 18 percent July 26, 2024Everything remains the same, including prices,” Dubinin said.
Alina Dzhus/socialbites.ca
Why might the Central Bank increase interest rates?
According to Vasiliev, There is talk of raising the key interest rate to 19% or even 20%:
*Signals from the Central Bank of Russia;
*The level of price increases. Inflation is running above the Central Bank’s forecast range of 6.5-7%. According to the Central Bank, the stable price increase in August has been running within the 6-7% range observed since the beginning of the year. In other words, inflation is not actually slowing down despite the current key rate of 18%;
*The underlying factors supporting inflation remain – labour market shortages, high domestic demand, rising inflation expectations, sanctions-related costs;
*Population and business inflation expectations continued to rise in August.
Following the meeting on July 26, the Central Bank raised its 2024 year-end inflation forecast to 6.5-7 percent and its year-end average interest rate forecast to 18-19.4 percent.
According to Vasiliev, this follows:
• If the year’s inflation is close to 6.5%, the key rate will remain at the same level 18%;
• Key rate will be increased if inflation approaches 7% up to 20%.
Vasiliev thinks that inflation will be 7.1% by the end of the year, and the risks are shifting to higher values. Therefore, he expects the key interest rate to be raised to 20% this fall.
What will happen to deposits?
Deposit rates in Russian banks now 18-22% Annual. According to the candidate of economic sciences, head of the department of global financial markets and fintech of the Russian University of Economics. GV Plekhanov Svetlana Frumina, deposit interest rates are maximum 25 years. The economist emphasized that the most serious increase in interest rates occurred in the crisis years of 1995-1996 and reached 100 percent.
Vasiliev said that if the Central Bank maintains the key interest rate, the profitability of deposits will remain at the same level. If the key rate increases by a similar amount, deposit rates will also increase.
Head of the analytical department of Zenit Bank Vladimir Evstifeev gave advice deposit money for up to one year.
According to Frumina, rising deposit rates create two additional risks for the economy. The first risk is the outflow of capital from the stock market, whose capitalization should be increased to 66% of GDP, according to the President’s message to the Bundestag. The second risk is that the flow of money into deposits could adjust the demand for federal credit bonds, which are today the main source of financing the budget deficit.
“Investors should not make hasty decisions and withdraw money from the stock market. In the long run, with proper portfolio management, the returns on stock market instruments can be higher than deposit rates.“, explained Frumina.
On the contrary, Vyacheslav Mishchenko, an expert at the Presidential Academy and a visiting professor at the Universidad Torcuato di Tella, advised investors in the stock market to consider the possibility of partially transferring money to the deposit in order to diversify their portfolio.
What about the loans?
According to the Financial Services service of the Moscow Exchange, the average rate on consumer loans (20 largest banks in Russia) increased by 1.1 percentage points in the period from August 17 to August 24, Up to 20.94%According to the Central Bank, the weighted average housing loan interest rate increased to 2024 in July 2024. 10.22%. This is the highest figure in the last five years. The value was higher only in July 2019. The average rate in June was 7.57%.
Credit rates also depend on the level of the key rate. Vasiliev explained that if the Central Bank maintains the key rate of 18%, there will be no significant change in credit rates. The expert explained that if the Central Bank raises the interest rate to 19-20%, credit rates will increase by a similar amount. Therefore He advised Russians to take out loans now.
Mishchenko predicted an increase in consumer loan rates Up to 25-30%mortgaged – Up to 12-14% After September 13:
“A return to low loan interest rates is unlikely before 2025. To get a loan at the lowest interest rate, it is now worth paying attention to special programs and promotions of banks, as well as refinancing existing loans.”
According to Vasiliev, borrowers should be prepared for the fact that money in the economy will remain expensive for a long time and will probably become even more expensive. He predicted that the average key rate will be 17.4% this year and 17.8% in 2025.
What will happen to the ruble?
According to Vasiliev, if the Central Bank keeps the interest rate at 18%, it will not have a significant impact on the ruble exchange rate at the moment. And if the Central Bank raises the rate to 19-20%, this may lead to a moderate strengthening of the ruble.
According to expert estimates, the average dollar exchange rate in July-September will be as follows: 89 rubleeuro – 97 rubleyuan – 12 ruble. The average cost of the dollar will be in October-December 90 rubleeuro – 99 rubleyuan – 12.5 rubles.
According to Mishchenko, after the decision of the Central Bank, the ruble exchange rate may temporarily strengthen, but then continue to fluctuate, and the dollar will cost 87-90 rubles:
“Due to the ongoing geopolitical risks and structural problems in the economy, a noticeable strengthening of the ruble in the next six months is unlikely. The ruble may strengthen in the next six months (given the positive external environment and the successful fight against inflation, the dollar exchange rate will fall to 85-87 rubles).
According to Frumina, the strengthening of the ruble largely depends on the decisions of government officials.
“However, the exchange rate is also affected by the cost of oil and gas resources, the income from which constitutes a significant part of the federal budget revenues. The economist suggested that the exchange rate of the national currency may fall if a number of factors, namely the increase in interest rates and the decrease in the cost of oil and gas resources, work simultaneously.
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.