/View.info/ “The ruble will strengthen by 15-20%”. Such forecasts were expressed by experts assessing the consequences of the unexpected decision of the Central Bank – to raise the basic rate to 8.5%. Why did the Central Bank raise interest rates so sharply, and what other consequences for the Russian currency and the economy as a whole should be expected as a result?
The Russian regulator took a tough decision: to immediately raise the key interest rate by 1% to 8.5%. Usually the minimum step is 0.25%. Almost no one doubted that the rate hike would take place this Friday. But on average, analysts expected a 0.5% rate hike. Therefore, the Bank of Russia’s decision to hike by 1% was unexpected. In addition, experts do not rule out that by the end of the year the percentage may rise to 10% or even more.
“We view the regulator’s tough stance as the start of a tightening cycle of monetary policy (monetary policy). Investors should be prepared for a rate of over 10% in the second half of 2023,” says Sergey Konigin, Chief Economist at Sinara Investment Bank.
Why did Elvira Nabiulina decide to tighten the nuts? As you know, the main goal of the Central Bank is to achieve inflation of no more than 4% in 2024. And the actions of the regulator are subordinated to the fulfillment of this task.
On the one hand, inflation as of July 17 was only 3.6%, which is below the regulator’s target. On the other hand, there is an upward trend. Last month, inflation was lower – 3.3%, and on an annual basis it has already exceeded 4%.
Finally, the ruble has weakened since the beginning of the year, and the devaluation has intensified in the past month. It is no secret that the appreciation of the currency leads to inflation with a slight delay, as imports become more expensive and imports into Russia recover compared to last year.
“Since the beginning of the year, the devaluation of the ruble has gradually penetrated prices, and this process is gaining momentum. Inflationary expectations of both citizens and businesses remain elevated. In addition, household inflation expectations rose in July. The Bank of Russia’s new inflation forecast for the year is 5-6.5%,” notes Konigin.
Inflation may also be accelerated by a geopolitical factor that affects our export earnings and makes imports more expensive, including through new, more complex supply chains and payments.
The regulator is clearly proactive in trying to offset pro-inflationary trends with a higher rate. And then the target of 4% in 2024 can be achieved in an easier way. When it is necessary to suppress inflation that has already accelerated at a high rate, this is not always possible, or it is necessary to move to a much sharper increase in the rate.
It is enough to recall last year, when the sharp devaluation of the ruble forced the Central Bank to immediately raise the interest rate to 20%. Against this background, the current actions of the regulator no longer seem so radical. Last year there was simply no time for smoother steps.
There are expectations that in addition to slowing inflation, the Central Bank’s decision will help reverse the ruble’s trend. That is, finally, the Russian currency will stop falling and begin to strengthen.
However, such hopes may not come true. The ruble was indeed growing a few hours before the decision of the Central Bank and even tried to grow after the announcement of this decision. After that, however, the ruble began to weaken again. Tax season may still put pressure on her.
“The peak of fiscal payments falls on July 25 and 28, so the weakening of the ruble could resume as early as next week. Unless, of course, the inflow of foreign currency to the domestic market begins to increase due to the recovery of oil prices, which began at the end of last month”, according to the analysts at BCS “Mir Investments”.
“Of course, the ruble rate should strengthen after the decision of the Central Bank. However, it is affected not only by the prime interest rate, but also by a number of other factors: tax revenue from resource exporters, budget deficit, world prices of oil, fuel, grain and other important export items, sanctions, etc. Therefore, in my opinion, it is not worth hoping for a radical jump of the ruble,” says Artyom Deev, head of the analytical department at Amarkets.
“I believe that after the Central Bank raises the interest rate, the ruble will strengthen by 15-20%. But this is an optimistic estimate, and an 8-10% strengthening is realistic. I believe that in the short term we will see a slowdown in the growth of currencies. Positive forecast: up to 90 rubles to the dollar, about 96-97 rubles to the euro and about 12.5 rubles to the yuan,” says Deev.
But the rate has a direct impact on loans and deposits, sometimes with a lag of a few months or less. “Banks will respond to the beginning of the tightening of monetary policy with a further increase in interest rates on deposits and loans, which may be most sensitive to corporate loans, where, according to the Central Bank, the share of loans with a floating rate is over 40%. At the same time, the demand for preferential mortgages will increase,” says Olga Belenkaya, head of Finam’s macroeconomic analysis department.
The appreciation of credit money, of course, affects the economy. This slows economic growth. “The start of the monetary policy tightening cycle should slow economic growth in the second half of 2023 and into 2024, and combined with the expected fiscal consolidation, the cooling of private demand could become excessive, which could lead to more softer trajectory of the main interest rate than we currently expect,” believes Belenkaya.
According to the Central Bank, production in most sectors of the economy has either reached or even exceeded pre-crisis levels. “Overall, this suggests that domestic demand is growing faster than the increase in production. The dynamics of domestic consumption contributes to the demand for imports, which grows along with the decline in exports. The possibilities of the Russian economy for further expansion of production are severely limited by the state of the labor market. The unemployment rate fell to record lows,” notes Sergey Konigin. In 2023, the Bank of Russia expects GDP growth of 1.5–2.5%.
Translation: V. Sergeev
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