A regular meeting of the Bank of Russia’s Board of Directors is scheduled for 23 April. The agenda is known – options for adjusting the key rate. There is little doubt that the regulator will once again play to raise the rate.
At the previous meeting on 19 March, it was decided to raise the rate by 25 basis points to 4.51% for the first time since December 2018. At the same time, there were statements about a return to a neutral monetary policy by the central bank, which implies a gradual increase in the key rate to the 5-6% level.
However, Bank of Russia Governor Elvira Nabiullina made a “grandfather’s caveat”. According to her, the course of the regulator has not been pre-determined yet and everything will be determined by the situation in the economy. Perhaps the main argument for further rate hikes is accelerating inflation.
According to the Ministry of Economic Development, published in early April, the growth rate of consumer prices in March was 5.79% in annual terms. For April, departmental analysts forecast a slowdown to 5.6%, with the prospect of a further decline to an “acceptable” 4% by the end of 2021.
Any upward or downward change in the key rate not only affects inflation and other macroeconomic indicators but also directly affects the interests of citizens. And they do not always lose out. In some cases, more attractive conditions for lending or placing available funds in bank deposits are opening up. Accordingly, the transition to a neutral monetary policy announced by the regulator promises changes soon.
According to Alexander Losev, CEO of Sputnik Capital Management, a significant devaluation of the ruble in 2020 and the export of inflation due to the colossal monetary issue of developed countries (coronal recession measures amounted to the equivalent of $14 trillion) combined with the super-soft policy of the Bank of Russia made real interest rates in rubles (real rate = nominal minus inflation) deeply negative.
“A prolonged period of negative rates is devastating for any country’s financial system because it triggers a ‘monetary death of the economy’ spiral. The rule works in Russia too – savings in roubles take a loss, the population invests in dollars or speculative transactions, investments fall sharply. As a result, the domestic financial system is destabilised, and dollarisation provokes a huge outflow of capital from the country,” says the expert.
It is paradoxical to support further economic recovery, the Central Bank of the Russian Federation should sharply increase its key rate, and radically, continues Alexander Losev. He believes that the increase should be at least 50 basis points, and even better – by 1.5%, that is, to the previously indicated level of 6%. This is necessary to stop the “flight” into dollars and to preserve investment resources within Russia.
Leonid Kornilov, the managing partner of the international fintech group Finbridge, suggested in a comment for Profil that the Central Bank Board of Directors will raise the rate by 0.5-0.75% at its meeting on April 23. There are good reasons for that – a large amount of money injected into the economy in recent months and the depreciation of the ruble against major world currencies.
The regulator’s priority now is to curb inflation. This problem is being solved by raising the cost of borrowing on the market, which is precisely dependent on the key rate. Its further growth, logically, with a certain time lag, will affect bank deposits making them more attractive for depositors.
The other side of the coin is the growth of interest rates on consumer and business loans, reminded Leonid Kornilov. The exception is the microfinance segment, which is less dependent on the Central Bank policy. “After all, deposits in microfinance organisations already offer higher yields, while loans to households are short-term and do not respond to the Central Bank’s decisions overnight,” the Profile’s interlocutor stressed.
For his part, head of analytical research at the Institute for Complex Strategic Research Sergei Zaverskiy notes that as long as the Central Bank’s “neutral” monetary policy suggests that the key rate should be in the 5-6% per annum range, the only question is the timing of this transition.
The formal reason that the regulator has is that annual inflation peaked in March. However, the consumer price growth rate is expected to decrease substantially during this year, the expert stressed. He does not rule out that further monetary policy will be determined, among other things, by the content of the annual address to the Federal Assembly, which the president will deliver two days before the next meeting of the Central Bank.
“We can assume that the hawkish rhetoric of the Bank of Russia management will be softened in this one. It is quite likely that the key rate will remain unchanged in April,” Sergey Zavrsky did not rule out.
However, in this case, it’s not just the Central Bank’s decision itself that is important, but also the theses that will be announced at the end of the meeting. The expert reckons, that they will determine to what extent and how quickly interest rates on market instruments – on deposits and loans – will start to change.
This understanding is especially important for long-term loans, particularly mortgages. Since the March meeting, the interest rates for housing loans have been slightly on the rise, and now the rhetoric can clarify how and what will change in this area.
For the market as a whole, a tightening of monetary policy and a rise in interest rates is not an encouraging situation. Such actions by the regulator always hurt domestic demand – both consumer and investment demand, summarised Sergey Zaversky.