What will happen to deposits, inflation and the ruble after a sharp increase in the key

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The Bank of Russia, contrary to market expectations, raised its key rate at a meeting on October 22 by 0.75 percentage points (pp) to 7.5%. The Central Bank has to act so sharply to stop the accelerating inflation: on October 18, it reached 7.8% in annual terms. The Board of Directors of the Central Bank even considered the possibility of raising the rate by 1 percentage point and does not exclude such a step at the next meeting, said the Chairman of the Bank of Russia Elvira Nabiullina during a press conference.

Vedomosti spoke with analysts and economists about how deposit rates will rise, what will happen to the ruble, the economy and when inflation will peak.

Deposits and loans

The decision of the Central Bank will give a new impetus to the increase in rates on retail loans and household deposits. Moreover, interest rates on deposits will grow more actively than credit ones, says Stanislav Duzhinsky, an analyst with Home Credit Bank, this will put pressure on the net interest margin of Russian retail banks in the near future. The current increase is the most unexpected for all market participants, after the previous revision of the key rate, it seemed that the increase period would end there, says Andrey Spivakov, managing director for retail credit products at Raiffeisenbank. The current rates on banking products took into account the expected increase in the key rate by 0.25-0.5 pp, says Rinat Kutuev, Treasury Director of Bank Saint Petersburg.

Several banks plan to raise rates on deposits – Sovcombank, Credit Bank of Moscow (MCB), Promsvyazbank, Raiffeisenbank and Absolut Bank, their representatives told Vedomosti. On average, banks expect to raise the rate by 0.2-0.5 percentage points.

Banks were preparing to raise the key – since the beginning of October, deposit rates have been raised by such large banks as VTB, Gazprombank, Promsvyazbank, Raiffeisenbank, FC Otkritie, Rosselkhozbank, as well as retail Absolut Bank, Zenit and Dom.RF. Alfa-Bank, Gazprombank, Post Bank, Rosbank, MKB have improved the conditions for savings accounts.

Some banks already have a promotional offer with a rate of 8%, but so far the average maximum rate on the market is still below inflation. The FRG100 index, which is calculated at the rates of retail deposits in the amount of 100,000 rubles. in 54 largest banks, October 24 reached 5.91%. Since the growth of the key rate in March this year, the index has grown by 1.84 p.p. and reached the value of the beginning of October 2019 (5.92%). The average maximum rate on deposits in the 10 largest banks, which, as a result of monitoring, is determined by the Central Bank, in the first ten days of October amounted to 6.43%.

By the end of the year, deposit rates will rise by another 0.75 percentage points, says Mikhail Vasilyev, chief analyst at Sovcombank. High rates on deposits motivate people to save more, he notes, and as a result, demand for goods and services decreases, prices stop rising and, as a result, inflation slows down. On deposits of individuals for a period of up to a year, taking into account the seasonality, rates may rise by 0.5-1 percentage points by the end of the year, Kutuev expects.

An increase in interest rates on loans may lead to a decrease in demand for them, says Dmitry Tarasov, head of the center for macroeconomic and regional analysis and forecasting of Rosselkhozbank: “Therefore, the dynamics of rates will be largely determined by banks, depending on the dynamics of customer demand.”

The increase in the key rate is automatically relayed to the worsening conditions for issuing loans, especially for SMEs, which represent a more risky segment for banks, says Daniil Nametkin, head of the Center for Investment Analysis and Macroeconomic Research at the CSR. The situation will be partially mitigated by the FOT 3.0 program announced by the Russian government (lending to small and medium-sized businesses for wages at 3% per annum), but it applies to a limited list of industries. Last year’s experience, Nametkin continues, showed that a huge number of other entrepreneurs who did not formally meet the criteria for receiving state support will also face a critical drop in revenue. Therefore, the expert argues, we can expect some cooling of business activity in the IV quarter of 2021, as a result of which the actual GDP growth at the end of the current year may be slightly lower than the current forecast value of the Bank of Russia (+ 4.0-4.5%).

Inflation and key rate

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%. In August and especially in September, inflation was higher than forecast, in early October the pressure did not decrease, Nabiullina noted during a press conference. In September, prices rose due to one-off factors, primarily in agriculture, but the Central Bank regards this situation as potentially dangerous: the rise in prices for important markers for the population (milk, meat, vegetables) can accelerate inflationary expectations. The risks are significantly biased towards pro-inflationary ones – among them Nabiullina included the covid restrictions that are introduced in a number of regions from October 28.

Due to the lack of components and raw materials, problems with logistics and the labor market, the supply cannot meet the growing demand, said the chairman of the Central Bank. But in such a situation, according to her, the increased demand will not turn into an increase in consumption, but will result in an increase in prices for those who are ready or forced to pay, and the inaccessibility of goods that have risen in price for the rest.

Taking into account the current dynamics of prices, one can hardly expect a significant slowdown in inflation by the end of the year, says Aghvan Mikaelyan, a member of the board of directors of the international audit and consulting network FinExpertiza. The rise in prices is far from the target of the Central Bank. Therefore, the expert admits that the rate may be increased to 8.5% by the end of the year.

The Bank of Russia may go to raise the key rate by 1 percentage point at once, if the annual inflation exceeds 8%, says economist of Sovcombank Mikhail Vasiliev. According to his forecast, in the near future inflation will peak at 7.8% and by the end of the year will slow down to 7.4% in annual terms. By the end of next year, Sovcombank predicts that inflation will return to the target of 4%.

Maxim Petronevich, senior economist at the Otkritie Research analytical department of Otkritie Bank, considers the likelihood of raising the key rate to the level of 7.75-8% by the end of the year as significant. According to his estimates, the peak of inflation may occur at the beginning of 2022 at the level of 8.2-8.3% in annual terms. Tarasov and Yevgeny Dorofeev, head of the investment products department at Tinkoff Investments, also agree that the Central Bank may raise the rate by another 0.5 percentage points by the end of the year. According to the forecast of Sova Capital economist Artem Zaigrin, the increase cycle will end in the first quarter of 2022 at the level of 8%.

An increase of 0.25 p.p. is awaited by the expert of the PRUE. G.V. Plekhanov Denis Domashchenko.

Sberbank has the most optimistic rate scenario by the end of the year – it will amount to 7.5%, says Igor Rapokhin, senior strategist for the debt market at SberCIB Investment Research. In a risky scenario, the key rate could reach 8% at the peak of the current monetary tightening cycle early next year.

Dollar below 70

The economists surveyed believe that now the ruble has a chance to strengthen against the dollar to 70 rubles / $ and below. One of the key questions is when the peak in the increase in the key rate will be passed, says Alexander Isakov, senior economist at VTB Capital for Russia and the CIS. 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. Analysts at 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.

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.

The ruble is strengthening due to high prices for export goods, increased rates growth and, most likely, by the end of the year the dollar will weaken to 69 rubles / $, says Anton Tabakh, chief economist of the Expert RA agency. The ruble is also supported by the sale of foreign currency by exporters ahead of large tax and dividend payments at the end of October, Vedomosti wrote on October 18.

But the strengthening of the ruble cannot be called a long-term trend, Nametkin says: the situation on the world commodity markets will stabilize as deferred demand is realized, and speculative capital will fix the profitability and close positions on the horizon of 12-18 months.

What will happen to the economy

The Central Bank did not change the forecast for Russian GDP growth – this year, according to the regulator’s estimates, it will grow by 4–4.5%, in 2022–2024 it will grow by 4–4.5%. – by 2-3% annually. With such parameters, the Bank of Russia is ready to sacrifice growth rates for the sake of reducing inflation and inflation expectations, despite the fact that a significant part of the growth will be provided by the growth of export volumes of oil and gas, says Maxim Petronevich, senior economist at the Otkritie Research analytical department of Otkritie Bank.

The long credit cycle, which began in 2018, has made and continues to make a significant contribution to the growth of the Russian economy, Isakov says. 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 is likely to lead to a return of growth rates from recovery this year to close to the dock average in the future, the economist notes. 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, says Zaigrin, in order to slow down demand, it should be above 2%.

But the economy will react to the Central Bank’s decision no earlier than 2022, experts say. There is a risk that in the first quarter of 2022 there will be a peak in rates and a maximum slowdown in business activity (the effect of a rate hike since the summer), notes Tabakh, and inflation will return to its normal behavior and go down sharply. So far, lending rates show significant growth this year – both for individuals and for the corporate sector, notes Renaissance Capital economist Andrei Melashchenko. Moreover, he 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.

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