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Wednesday, December 7, 2016

From the Central Bank wait for further reduction of the key rate


One of the most important for the Russian economy indicators – the key rate of the Central Bank finally reduced to values that had a year and a half ago. Some opponents of the Central Bank, however, required to reduce the rate even more. What are the implications of the decision of the Central Bank as for the credit market and for the ruble?

The Bank of Russia for the first time since August last year decided to reduce the key rate. It is reduced by 50 basis points from 11% to 10.5% from 14 July 2016. For the first time the regulator has created intrigue around his meeting and managed to surprise. Pending rate cut last week were in the minority. Although on the eve of the economists ‘ views were divided almost equally.

“We can only welcome the decision of the Central Bank of the Russian Federation, which will contribute to the further decline in interest rates in the credit market”

After the Bank of Russia on December 16 2014 sharply raised the rate from 10.5% to 17%, he gradually moved to back to the same mark. Finally, after two and a half years, the key interest rate back to a Dec 2014.

First Deputy Prime Minister Igor Shuvalov welcomed the decision of the Board of Directors of the Central Bank: “I Think it will be very positively received by the market”.

However, the Central Bank has kept moderately hard rhetoric. The reduction of the key rate cannot be called the beginning of a cycle of policy easing, said the head of the Central Bank Elvira Nabiullina. “We are positive that with the right monetary policy can achieve inflation target of 4% by the end of next year, so the potential to lower rates there, but those decisions depend on how future economic situation, so here take a precautionary approach. The potential is there, but to say that this is the beginning of the cycle, we can not” – said Nabiullina.

Alyona Afanasyeva from Forex Club says is still a positive change in the rhetoric of the regulator. If in April, the Central Bank said that it will reduce rates only if inflation risks will be reduced, but now it says it is willing to go the extra easing as slowing inflation gives more confidence in getting an inflation target of 5% in may 2017 and 4% by the end of next year.

From March the situation is really much improved. Oil has overcome a mark in 50 dollars for barrel, in the end, the average annual value calculated on the level of 40 dollars per barrel, which is 30% more than expected by the regulator. “Moreover, expectations on the future dynamics of oil and remain positive due to reduced production in the United States, and in connection with market sentiment,” says Afanasiev.

Shows the active growth of the Russian currency, however, strengthening it significantly lags behind oil. Since the beginning of the year oil prices rose by almost 80% and the ruble strengthened only by 8%. Important for the Central Bank rate – inflation has shown a gradual decline. In April and may, she slowed down to 0.4% vs. 0.5% in March, 0.6% in February and 1% in January. The annual inflation rate in may dropped to 7%. In comparison with record inflation of 15% in July last year is, of course, a lot of progress.

“Taking the decision to reduce the key rate, the Bank of Russia proceeded from the fact that inflation is slowing and data on the dynamics of GDP and industrial production show the stability of the Russian economy to low oil prices. The Bank of Russia predicts that no later than the second semester begins the growth of Russia’s GDP QoQ, while positive trends in the economy will not be accompanied by increased inflationary pressure,” explains the Deputy Director of analytical Department of “Alpari” Natalia Milchakova.

The effects of lower rates

In theory, the key rate should encourage lower interest rates on loans and business activity.

The head of the Duma Committee on economic policy and President of Association of regional banks of Russia Anatoly Aksakov sure that lowering the rate would be a positive signal for the market and will contribute to credit growth.

“The economy cannot produce demand for expensive credit resources, lending rates are already reduced due to lack of demand, so we can only welcome the decision of the Central Bank, which will contribute to the further decline in interest rates in the credit market,” – said Aksakov.

The largest Russian Bank – Sberbank – in this regard, ahead of the regulator and had previously cut rates on deposits interest rates on loans to the public, and on Friday announced the reduction of interest rates and for small businesses.

Financial analyst FxPro Alexander Kuptsikevich agree that the softness of the review of CBR, and information on, further lowering the key rate may cause a further wave of reduction of interest rates by commercial banks. “The space for this is more than enough, as now the rates on deposits significantly outperform inflation, that the hand of investors, but is hardly the norm,” he says.

However, the effect on the economy will only become apparent with the further and dramatic reduction of interest rates on loans and deposits of commercial banks. “Besides the business activity has a greater impact stability courses than the key rate. And if the resumption of the easing cycle will cause a new wave of weakness of the ruble, the business can once again become more careful,” says the source.

However, Anna Bodrova of Alpari” believes that today’s decision is unlikely to significantly affect the cost of lending, as half a percentage point a little that solve. “While the Central Bank is creating a new trend for betting on the long term: if inflationary sunset above will not take place, then in the fall, the Central Bank can lower the rate again,” she said.

In theory, the decrease in Central Bank rates of the Russian ruble should respond by falling. In practice, however, turned out differently. Immediately after the announcement of the decision of the regulator the dollar and the Euro showed was the growth against the ruble, but its weakening was short-lived: after just half an hour after the announcement of the decision by the Bank of Russia the ruble exchange rate again shifted to growth. “The Russian ruble declined to respond to the reduction in the rate drop, since the rate is still higher than foreign analogues and does not deprive the attractiveness of investments in Russian rubles” – says Kuptsikevich.

However, by the end of the trading session the dollar and the Euro once again had a strong play as the fall in oil prices. 18.30 GMT to worth $ 64.83 for the ruble, Euro – 73 rubles.

Why do 11% instead of 9%

However, some economists criticized the Central Bank for the fact that he continues to hold the key rate too high. So, the chief economist of Sberbank CIB Evgeny Gavrilenkov believes that the Central Bank in April was to “break the vicious circle” and to lower the rate to 9%.

“I believe that the rate had to be reduced for a long time. At the current rate of inflation, it is behind by 200 b. p. from the level that should be. If you take the moving average inflation for four or five months, it has now close to 7% in annual terms. And the Central Bank rate should now be at level 9%” – explained the RNS Gavrilenkov.

Anatoly Aksakov also considers that the Central Bank has all the conditions in order to reduce the key rate to single digits. If a barrier were used to high inflation, falling oil prices and the weakening of the national currency, now the market is stability, said Aksakov. “Inflation in annual expression slowed down, the ruble is stable, but there is continuing decline in investment and consumer demand.” Therefore, the market will expect the Bank of Russia’s further movement in the direction of lowering the key rate, said the head of the Duma Committee, quoted by RIA “Novosti”.

However, the Central Bank has its own logic and completely fair, protects the controller, the Director of “Alpari” Alexander Razuvaev.

“Pessimists expect the fall in oil prices in the second half, plus the second half of the ruble is always worse than the first. The Central Bank, which is responsible for inflation and the exchange rate, naturally, cautious and conservative. The stability of the ruble automatically leads to a decrease in interest rates on the ruble debt market. As for the debt market will fall and interest rates on loans direct to borrowers”, – says the expert.

In addition, the policy of the Central Bank of the Russian Federation is predictable, and this is valued by investors. “The monetary policy of the Central Bank of the Russian Federation aimed at long-term sustainable economic growth and low inflation instead of immediate short-term results. One can only wonder how the mega successful keep defense from industry lobbying,” says Razuvaev.

Finally, due to gradual, not sharp reduction of the key rate of the regulator to protect the population from inflation and sharp decline in interest rates on deposits. “Now the Deposit rate to first class banks is approximately equal to the rate of inflation. Their too rapid decline would lead to loss of private savings. And it is very bad history, especially before the September election,” concludes the source.

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