We expect the Central Bank of Russia to choose between a 200 basis point or 300 basis point cut to 11-12% annualized interest rate at its extraordinary meeting on May 26. Given the unplanned nature of the decision, we are inclined to believe that the CBR will choose a 300 basis point move as it did at the two previous meetings. and reduced the rate to 11% per year.
The slowdown in inflation, the fall in inflation expectations, the rapid strengthening of the ruble, the decline in lending and economic activity are in favor of a sharp loosening of monetary policy.
Since the last meeting of the Central Bank on April 29, the ruble has strengthened 21% against the dollar, rising from 71 to 56. The strengthening of the ruble helps to lower the cost of imported goods and slow down seasonal inflation. Norms for the last two weeks. Rosstat reported that weekly inflation slowed to 0.05% by May 13, from 0.12% a week ago. Weekly deflation is not being ignored in the coming weeks.
The Central Bank of Russia reported that due to the strengthening of the ruble, the population’s inflation expectations fell to 11.5% in May from 12.5% in April and returned to May levels of the previous year.
At the same time, strengthening the ruble is unprofitable for the budget of the Russian Federation and exporters. Earlier in the week, the Ministry of Economic Development reported that “the strength of the ruble is currently at its peak levels” and that further adjustment of the exchange rate to new economic realities should be facilitated by a decrease in the Central Bank’s key rate. Bank.
At the beginning of June, three-month deposits issued at 20+ interest rates in banks expire. Lowering the key ratio would make it possible to redistribute the funds released in favor of consumption and other investment instruments, including stock and foreign exchange markets.
Central Bank loan data for April showed that mortgage issuances of banks decreased by 3.2 times, consumer loans decreased for the second month in a row (-1.8%), and the corporate portfolio of banks practically did not change.
We expect the key interest rate cut to lead to a reduction in the cost of core banking products such as deposits, consumer loans, mortgages, as well as lower rates in the debt market. Credit will become cheaper in the economy, which will support consumer and investment demand.
We believe that the Bank of Russia will leave a signal about the possibility of further lowering the key interest rate this year. We believe the key rate could drop to 9-10% per year by the end of the year.
The author is the principal analyst of Sovcombank.
The author expresses his personal opinion, which may not coincide with the editors’ position.
Source: Gazeta
