The main intrigue on the eve of the Central Bank meeting was the question of a possible increase in the key rate and the size of this revision. Earlier, Kirill Tremasov, head of the monetary policy department of the Central Bank, announced that three options would be considered: an increase of 25 bp, 50 bp. and keeping the rate at the current level. However, the emphasis of the speeches of the regulator’s representatives was made on increasing inflationary pressure, which cut off the third of the listed opportunities. At the same time, recent statements by Elvira Nabiullina and Kirill Tremasov about the need for a phased tightening of the monetary policy suggested that the most likely rate hike would be by 25 bp.
However, the Central Bank’s decision was unexpected: the rate was revised by 0.5 percentage points, to 5%, which contradicted the expectations of most economists, who expected a smoother increase during the second quarter. Thus, the Central Bank worked ahead of the curve. Since inflation targeting remains the basis of the monetary policy of the Russian regulator, we can say that the final decision of the Central Bank was influenced by the publication on April 22 of Rosstat data on weekly price growth rates: from April 13 to April 19, inflation in Russia accelerated to 0.2% (0.1% last week), since the beginning of the year consumer prices have already increased by 2.5%. In addition, annual inflation in Russia accelerated to 5.79% in March.
The effect of raising the inflation base in April 2020, when the COVID-19 pandemic began to exert significant pressure on the Russian economy, could not slow down price increases in the same period of 2021. As a result, the regulator had to react to inflationary risk. Food prices rose 7.58% in annual terms in March, despite price controls on selected goods and attempts to contain the cost of motor fuel.
Although annual inflation slowed down to 5.5% in the week before April 19, the rate of decline was lower than the Central Bank had expected. This month, the main groups of goods and services, due to which the consumer price index shows outstripping dynamics, are some food and non-food products, as well as medicines. As a result, the Bank of Russia inflation forecast for 2021 was raised to 4.7-5.2%. Return to target 4% postponed to mid-2022
I would also like to note the dependence of the value of the key rate in Russia on similar indicators in countries with developed economies. An increase in this difference can attract speculative capital to the Russian market, but it limits the stimulating effect of the current monetary policy. Regulators in developed countries are not yet planning to tighten monetary policy, although consumer prices in the United States in March grew at the fastest pace in almost nine years (+ 2.6%, y / y). However, the low base effect of 2020 allows the Fed members to view the current price pressure as temporary, not considering it dangerous for the economy. Fed members do not intend to raise the rate until the end of 2023. The European Central Bank also expects key rates to remain at or below current levels until inflation begins to confidently approach its target of just under 2%. This limits the possibility of a future increase in the key rate by the Russian Central Bank.
The gradual tightening of the monetary policy by the Bank of Russia potentially reduces the volatility of the ruble and may contribute to its strengthening in the long term. On the other hand, the decrease in geopolitical tensions due to the return of the troops of the Southern and Western military districts from the southern borders to their permanent deployment points contributes to the growth of Russian assets, including the strengthening of the ruble, which in the future will limit inflationary pressures.
In the baseline scenario, inflation will continue to decelerate. I believe that if this trend persists until the end of the year (even if the forecast for the growth rate of prices is slightly exceeded), the regulator may additionally raise the rate by 25 bp once or twice. Accordingly, it will reach 5.25-5.5%. In the absence of growth of risks in the economy, the average maximum interest on deposits of the 10 largest banks may reach 5.35-5.75% by the end of the year.
If an inflationary scenario is realized, the Central Bank may discuss an accelerated tightening of monetary policy. Last year, disinflationary factors were mainly manifested, supported by low consumer demand, which made it possible to postpone the tightening of monetary policy. However, there are already clear inflationary risks on the horizon at least until the end of the year. This is confirmed by the increased purchasing power and the forecast of the Ministry of Economic Development for the growth of real disposable income of the population at the level of 3% and real wages by 2%.
If the inflationary scenario is realized, the rate may be raised several more times, including at the June meeting of the Central Bank, and at the end of this year, approach the upper limit of the range of 5-6% or reach it. In this case, the average maximum rate on deposits of the 10 largest banks may be 5.85-6.25% by the end of the year.
The reaction of the ruble and stock indices to the meeting of the Central Bank is close to neutral. Immediately after the announcement of the regulator’s decision, the ruble attempted to strengthen by 25 kopecks. against the dollar and the euro, but quickly returned to their previous values. Quotes also did not react to the rate hike.
At the same time, the Central Bank’s decision creates prerequisites for the strengthening of the ruble. If inflation does not slow down by the end of April, this will be a reason to raise the rate again at the next meeting of the regulator on June 11. However, it seems more likely to me that the Central Bank will not continue to tighten monetary policy in the near future.
Author – Financial Analyst
The editorial position may not coincide with the opinion of the author