Sovcombank chief analyst Mikhail Vasiliev told socialbites.ca that inflation in the coming two months is expected to slow but stay well above the 4 percent target. The latest data from the Ministry of Economic Development of the Russian Federation show annual inflation from December 20 to 26 at about 12.2 percent. This backdrop, along with rising inflation expectations, makes it unlikely that the Bank of Russia will cut the key rate soon.
The key rate is what commercial banks pay to borrow from the central bank. It serves as the anchor for lending to businesses and households at higher interest rates. The Bank of Russia uses this rate to steer price growth. When the central bank raises the rate, loans cost more, deposits yield higher returns, spending tends to ease, and inflation eases alongside slower economic growth. If the rate climbs by one percentage point, banks typically raise loan and deposit rates by roughly a similar amount. A rate cut tends to lower borrowing costs in tandem with lower deposits, helping stimulate spending. A higher key rate can also strengthen the ruble through currency flows.
Elvira Nabiullina, head of the Bank of Russia, has indicated that the key rate will stay elevated until there are clear signs of a sustained slowdown in price growth and shrinking inflation expectations. After the December policy meeting, observers noted a spike in inflation expectations among the public, with forecasts for faster price growth in the coming year. Analysts see the need for the ruble to stabilize and monetary conditions to stay tight to prevent a fresh surge in inflation.
Some voices point to a possible strengthening of the ruble in the next couple of months as seasonal demand for foreign currency declines. In the approaching February period, many analysts expect the central bank to take its decision based on the then available statistics. An economist from REU GV Plekhanov and a colleague emphasized that the February 16 decision will depend on the latest data and post-holiday statistics, which will be published in late February. A market watcher from BitRiver noted that high rates slow growth, and small and medium sized businesses need more affordable financing as the economy begins to recover.
In a risk scenario, Vasiliev suggested the key rate could rise to 17 percent if inflation remains stubborn in the near term. That outcome would push up both deposit and loan costs in the weeks after the February meeting. Analysts also discussed how this level would influence consumer financing and the pace of economic activity.
With regard to deposits and loans, expectations point to minimal changes in deposit and loan rates immediately after the February meeting. The base scenario projects the key rate holding at 16 percent in the near term. Some observers expect rates to stay unchanged through March as well. After the rate jumped to 16 percent, major banks raised deposit yields, with the top return approaching 16.5 percent. The Financial Services analytical center tracks deposit yields in Russia’s top banks and shows three to twelve month returns in the mid-teens at the end of 2023, while consumer loan rates hovered around the low twenties. Mortgage rates were also seen rising in some forecasts. If the rate climbs further to 17 percent, deposit and loan costs are expected to rise by about a percentage point in the weeks following the decision.
When will the central bank have room to ease policy? Vasiliev suggested that room to cut the rate would likely open in the middle of the year, around June or July, provided inflation slows and price growth cools. Some market commentators have offered that the rate could begin a gradual downward trajectory as inflation regularizes and the ruble stabilizes. A widely cited view is that a stable ruble and tight monetary conditions could still see the policy rate in double digits through much of 2024 and potentially into 2025, affecting savers and borrowers alike.
On the timing of opening new deposits and taking out loans, Vasiliev forecasts a slower improvement in rates through the first half of 2024, followed by a more noticeable shift in the second half. A market analyst cautions that if rates ease smoothly, borrowers may not need to wait for a full year. It could be advantageous to open deposits early in 2024 and consider loans later in the year, as rates might fall from the mid-teens to the low teens by year-end. Economists also noted that delaying large borrowings could be prudent if there is no urgent need, given the uncertainty around the pace of the rate path and inflation dynamics. The central message remains that a pause in tightening could sustain higher financing costs for longer, shaping consumer and business decisions through the year.