Overview of the Central Bank’s June 7 Decision and Market Outlook
Two scenarios dominated conversations ahead of the June 7 meeting: keeping the main rate steady or nudging it higher. Leading economists from VTB Group and Sovcombank outlined their expectations to socialbites.ca. Rodion Latypov, the chief economist at VTB Group, leaned toward a shy stance of maintaining the rate, with a cautious inclination to lift it if needed. Mikhail Vasiliev of Sovcombank suggested a possible move up, noting a likely 16% rate as a baseline with room to rise to 17% depending on evolving data.
On the same day, former deputy chairman Sergei Dubinin expressed a view favoring a cautious hold or modest increase in talks with several financial institutions and academic bodies. Central Bank Deputy Governor Alexey Zabotkin indicated that the option to raise the rate would be thoroughly evaluated at the June 7 session.
What is the key rate?
The key rate, sometimes called the “base rate,” is the minimum cost at which commercial banks can borrow from the Central Bank to lend to households and businesses. It serves as the central instrument of monetary policy in Russia. The Board of Directors, which includes the Governor and fourteen regulatory experts, sets this rate and is approved by the State Duma for a five-year term. Board meetings follow a quarterly schedule, though extraordinary sessions can occur during emergencies, such as the February 2022 sanctions episode when the rate jumped to 20% and then adjusted over time. As of July 21, 2023, the rate began to rise again in response to inflation pressures and expectations. The current level stood at 16%, a figure held constant across three meetings. The next rate decision was expected at 13:30 Moscow time on June 7.
Analysts noted that the regulator typically bases its stance on the balance of risks: inflation trends, consumer activity, and the labor market. Dubinin shared the view that there was no obvious trigger for a sharp or decisive rate increase, and that a rate cut would be inappropriate given the prevailing conditions.
Latypov echoed this sentiment, pointing to the Central Bank’s updated forecast which suggested a maximum average key rate of 16% in 2024, with 17% considered only as an alternate scenario. He argued that recent statistics did not justify treating the higher path as base, underscoring the inertia in the current environment.
Why might the Central Bank raise rates?
Vasiliev estimated a roughly 60% chance of a rate increase, with a 40% probability of holding. In their base scenario, he anticipated a rise to 17% at the next meeting and then a hold at that level through year-end. He also warned that if inflation remained unrelenting, an increase to 18–20% could emerge as a possibility.
Inflation figures from May showed a continued challenge for the Bank. The annual inflation rate stood around 8.05%, while the central forecast for 2024 was revised higher, with core inflation climbing to its strongest level since the prior November. According to Vasiliev, inflation ran above the Bank’s target, a situation the regulator has faced for several years running. Zabotkin noted that actual inflation also exceeded the central estimate for the year, with market projections varying on the year-end outcome. The consensus among analysts was that inflation would remain above target again this year, adding to the case for careful deliberation before any rate shift.
Vasiliev highlighted the Bank’s criteria for moving rates: ongoing strength in consumer activity, and rigidity in the labor market and output. He cited unemployment at a historical low and robust first-quarter GDP growth that outpaced earlier forecasts. He asserted that the Bank already possessed several arguments to lift the rate, but the decision could be deferred until the upcoming meeting to assess the full quarterly picture. A cautious forecast from BCS World of Investments suggested a potential 200 basis point increase if inflation picks up, lifting the rate to 18% in the summer.
Implications for deposits
Deposit rates in Russia vary, currently ranging from around 10% to the mid-teens on an annual basis. VTB projected that existing conditions could persist for three to four months, with occasional promotional bursts for short periods. Banks generally adjust deposit terms in line with market conditions and liquidity needs, with the key rate serving as the primary signal for setting short- and medium-term borrowing costs.
Analysts noted that if the Central Bank raises the rate by one percentage point, deposit rates typically follow suit by at least the same amount. VTB encouraged customers to consider opening deposits now, especially with maturities up to six months. Zenit Bank’s Evstifeev added that deposits could become more attractive if the key rate moves higher or if the central bank signals a tightening bias on June 7. Shorter-term deposits were viewed as particularly favorable in this scenario, given the expected persistence of higher rates beyond the initial period.
Impact on loans
Loan costs for untargeted consumer credit and mortgages showed sensitivity to the policy rate. As of mid-May 2024, overall loan costs—when including fees and other payments—stood higher year over year. Mortgage rates had been highlighted as more accessible in certain programs, though overall lending costs rose with rate expectations. VTB advised borrowers to assess their real needs rather than waiting for a perfect moment, noting that long-term real estate value gains can justify mortgage borrowing. Special concessionary mortgage programs were cited as available at reduced rates, including options around 8% and 6% under certain conditions.
Experts anticipated that lending volumes would remain resilient even if the key rate rose toward 17–18%, reflecting ongoing demand for credit across households and enterprises.
Rubles and exchange rates
Market commentators argued that a higher policy rate could support the ruble, though the effect would be limited. The principal driver of the currency remains the export–import balance and broader external demand. Analysts cautioned that despite a recent ruble strengthening, demand for money is likely to normalize as supply chains stabilize and export revenues adjust with oil price movements. Projections for the ruble versus the dollar and the euro remained cautious, with a wide trading corridor anticipated over the summer as market participants weigh inflation dynamics and external factors.
In short, strategic decisions by the Bank of Russia will hinge on inflation trajectories, consumer behavior, and the labor market, alongside the evolving external environment. Investors and borrowers alike should monitor the central bank’s communications and the incoming data for a clearer view of the policy path in the months ahead. (Source attribution: central bank briefings and market analyses.)