Reasons for the rate cut
Central Bank governor Elvira Nabiullina said the regulator’s decision to cut the key rate from 9.5% to 8% was influenced by the revised macroeconomic forecast. At the press conference held after a board meeting on monetary policy, he noted that the economic downturn in Russia will prolong over time and may not be as deep as previously expected.
“Speaking of this year, the decline in GDP is projected to be much smaller due to a more moderate drop in exports. This is primarily due to the redistribution of oil exports to new markets,” he said.
How reported Inflation expectations of the population and businesses have recently dropped “noticeably” to spring 2021 levels, the Central Bank’s website states. At the same time, the decline in business activity is slower than the Central Bank expected. “External conditions for the Russian economy remain difficult and continue to significantly limit economic activity,” the financial regulator said.
“The Central Bank of Russia will make further decisions on the key rate by assessing the dynamics of actual and expected inflation relative to the target, the economic restructuring process, as well as the risks arising from domestic and external conditions and the response of financial markets. markets to them,” he said.
The article, published on the financial regulator’s website, also says that the Bank of Russia will evaluate “the feasibility of lowering the main interest rate” in the second half of this year. According to the forecast of the Central Bank, annual inflation will reach 12.0-15.0 percent in 2022, 5.0-7.0 percent in 2023 and 4 percent in 2024, given the ongoing monetary policy. will regress to .
According to the Central Bank, annual inflation decreased to 15.9% in June (after 17.1% in May) and fell to 15.5% as of July 15, according to forecasts.
“The fall in headline inflation was largely driven by the continued correction in goods and services prices after the sharp rise in March. This was facilitated by the dynamics of the ruble exchange rate and the generally restrained dynamics of consumer demand, ”the financial regulator explained.
The Central Bank press service stated that the significant decrease in inflation expectations also contributed to the slowdown in inflation. Thus, in July, the inflation expectations of the population and the price expectations of enterprises “decreased markedly” and reached spring 2021 levels “largely reflecting the strengthening of the ruble and the general slowdown in inflation”.
“The important factors for further inflation dynamics will be the dynamics of the ruble exchange rate, the efficiency of import substitution processes, as well as the scale and speed of the recovery in imports of finished goods, raw materials and components,” the press service said. said the Central Bank of Russia.
The Central Bank believes that the key rate cut decisions taken in April-July will “increase the availability of credit resources in the economy and limit the scale of the decline in economic activity”.
Businesses and vacancies
According to the Central Bank of Russia, domestic enterprises still “have difficulties in production and logistics.”
“However, business perceptions are evolving as we diversify suppliers and markets for finished products, raw materials and components. Consumer activity remains under pressure, but is starting to recover, including a gradual increase in imports of consumer goods. At the same time, the decrease in imports (due to sanctions – socialbites.ca) is still significantly ahead of the decrease in exports, ”said the author.
The Central Bank also believes that the labor market situation is “stable”: the unemployment rate is “close to historical lows”, although the number of vacancies has decreased.
The Central Bank of Russia forecasts GDP to contract by 4.0-6.0% this year. At the same time, “the decline will be largely driven by supply-side factors.”
The fiscal regulator acknowledged that “tighter monetary policy may be needed” to return inflation to the target in 2024 and keep it close to 4% in the future, in case the budget deficit widens further.
“The next meeting of the Board of the Central Bank of Russia, which will consider the key rate level, will be held on September 16, 2022,” the press service said.
Falling prices and low inflation
Mikhail Zeltser, stockbroker at BCS Mir Investments, said in an interview with socialbites.ca that few people expected such a sharp decline in the key ratio. According to him, “declining inflationary expectations in the country and the return of deflation have outweighed, and have taken the side of very few experts who expect the key rate to drop to 8% per annum.”
“The regulator made the decision based both on the strongly strengthening ruble and the reduction in inflation, and on the need to support the country’s industrial strengths. “The economy needs cheap credit in times of restrictions and import shortages,” he said.
According to the forecasts of the expert, the Central Bank will be more cautious in the next meetings.
“Deposits will continue to lose their profitability. The latest estimate of the maximum rate at the largest banks is 7.65%. Obviously, the yield will drop below 7% in the coming weeks. Loans will also become more affordable. Given the suppressed demand for credit sources from institutions and the public, and a cheaper loan from the Federal Reserve, banks could lower interest rates,” Zeltser notes.
Representatives of MTS Bank, Doma.RF, Moscow Credit Bank, Zenith, Rosbank and Absolut Bank told socialbites.ca that they are considering lowering mortgage rates after lowering the key rate.
According to Dom.RF, the average mortgage rate for new buildings in July was 10.7% per annum and 10.8% for finished residences. Anton Pavlov, vice president of Absolut Bank, said that “mortgage rates will be reduced by a similar amount”.
According to the forecasts of Absolut Bank, MTS Bank and Sovcombank, the weighted average mortgage rate in August will be 10% – 9% by the end of the year.