The decision of the Bank of Russia to raise the key rate by 0.75 pp to 7.5% came as a surprise to the market. On the eve of the meeting, the majority of analysts surveyed by Vedomosti expected an increase of 0.5 percentage points, the rest – an increase of 0.25 percentage points. With such radical actions, the Central Bank is trying to stop accelerated inflation – on October 18 it reached 7.8% in annual terms …
The Bank of Russia also sharply raised its inflation forecast at the end of the year to 7.4-7.9%. In the latest – July – forecast the indicator was at the level of 5.7-6.2%. Against the backdrop of accelerated inflation, Central Bank Chairman Elvira Nabiullina during a press conference did not rule out raising the rate at the next meeting by 1 percentage point at once.
Impact on the economy
The Central Bank forecasts GDP growth this year by 4-4.5%. In 2022–2024 – by 2-3% annually.
With such parameters, the Bank of Russia is ready to sacrifice growth rates for the sake of lowering inflation and inflation expectations, says Maxim Petronevich, senior economist at Otkritie Research, Otkritie Bank, despite the fact that a significant part of the increase will be provided by an increase in export volumes of oil and gas.
The economy will react to a sharp increase in the key rate of the Bank of Russia no earlier than 2022, says economist at Renaissance Capital Andrei Melashchenko. So far, lending rates show significant growth this year – both for individuals and the corporate sector. Moreover, Melashchenko adds, maintaining economic growth is not the mandate of the Central Bank, which has retained its forecast for GDP growth for 2021 and 2022. without changes.
The long credit cycle, which began in 2018, has made and continues to make a significant contribution to the growth of the Russian economy, says Alexander Isakov, senior economist at VTB Capital for Russia and the CIS. Due to the growth of lending, the financial sector in real terms grew by an average of 9.5% in 2018-2020. against an average GDP growth of 0.6% for the economy as a whole. The tightening of monetary policy and the transition of the cycle to a more mature phase will most likely lead to a return of growth rates from recovery this year to near-average dock-like rates in the future, the economist notes.
The rate hike will not yet have a pronounced effect on GDP, as the policy continues to be neutral, says Sova Capital economist Artem Zaigrin. The real interest rate, calculated as the key minus the consumer price index for six months in advance, is at about 1.5% according to the company’s forecasts. In order for it to slow down demand, it must be above 2%.
For now, much of the recovery in demand is excess demand, which is facing limited supply, Zaigrin says.
Impact on the ruble
The rate hike is helping to strengthen the ruble due to more attractive nominal rates for exporters and non-residents buying OFZs, Zaigrin said. According to Sova Capital estimates, the fair exchange rate could be 66-67 rubles / $ at the end of the cycle of raising the key rate and the return of non-residents to Russian OFZs. According to Zaigrin’s forecast, the increase cycle will end in the first quarter of 2022 at the level of 8% – it is possible that in December.
The current and expected rate hike may have a positive effect on the inflow of portfolio investments into Russia (the share of non-residents in OFZs began to recover from July, now it is 21%) and, accordingly, contribute to the strengthening of the ruble, which at the moment dropped below 70 rubles / $. says Melashchenko. But the transfer of the strengthening of the ruble to the price dynamics will take some time and will be limited by the capabilities of suppliers. With the current combination of oil ($ 80-85 / bar.) And rates in Renaissance Capital, the dollar exchange rate is expected at 69-70 rubles / $ at the end of the year.
One of the key questions that worries financial market players is when the peak in the increase in the key rate will be passed, Isakov says. The outstripping rate hike in relation to expectations brings the moment of passing this peak closer and should support the ruble in the coming months. VTB Capital expected the ruble to strengthen against the dollar in the first quarter of 2022 to RUB 68-70. before the decision of the Bank of Russia and see an increase in the likelihood of this scenario, taking it into account.
OFZ yields with maturities of 3 years or more rose by 10-20 bp on Friday. etc., the maximum growth fell on five-year bonds, the yield of which increased from 7.6 to 7.8%, says Petronevich. In the face of continuing uncertainty, the long part of the curve will stabilize in the foreseeable future near the 8% mark, says Aton chief strategist Alexander Kudrin.
If the Central Bank raises the rate by 1 percentage point next time, yields on the debt market may rise by another 50-75 bp. etc., notes the chief economist of Sovcombank Mikhail Vasiliev.
According to Vasiliev, the US Federal Reserve will also put pressure on the Russian national debt in the near future: next month, the American regulator is expected to begin to roll back the quantitative easing policy and reduce the purchase of bonds from the current $ 120 billion a month.
According to Vasiliev, an increase in the real ruble interest rate increases the attractiveness of Russian assets and leads to an inflow of foreign capital into the country, including through carry trade operations. He believes that this factor will support the ruble in the coming months and in the coming weeks it may strengthen to 69 rubles / $ and 81 rubles / euro.
What will happen to inflation
The likelihood of a further increase in the key rate to the level of 7.75-8% is regarded by Petronevich as significant. According to Otkritie Research estimates, inflation may peak in early 2022 at 8.2-8.3% in annual terms.
According to the basic forecast of Sovcombank, annual inflation is now passing its peak, Vasiliev continues. He expects consumer prices to rise by 7.8% in October, and inflation will slow to 7.4% y / y by the end of the year. By the end of next year, Sovcombank predicts that inflation will return to the target of 4%.
At the same time, Vasiliev sees the risks that annual inflation may exceed 8% and then the Bank of Russia may go to increase the key rate by 100 bp at once. in December – up to 8.5%.
Inflation is likely to remain at an elevated level by the end of 2022 and, according to optimistic estimates from Sova capital, could fall to 4.5%.