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Sunday, March 18, 2018

The Central Bank lowered the key rate with an eye on elections

The Bank of Russia lowered its key interest rate from 10.5% to 10%. Been waiting for this. But the sensation is Central Bank created. Surprising everyone, he just announced that the standard rate will no longer change in 2016.

photo: Natalia Muslinkina

On the eve of the meeting of the Board of Directors of the Bank of Russia’s economic development Minister Alexei Ulyukayev said: if the rate cut doesn’t happen, “it will be beyond good and evil.” He relied on the fact that there is a decrease and inflation and inflation expectations. On the regulator’s website notes that in August this year to August of the last price increase did not exceed 6.9 percent. But three weeks in a row, according to Rosstat, the prices do not grow. This means that over the year inflation is unlikely to rise above 6%, so the rates to the level of 10.5% would be challenging.

But why the Central Bank needed to state in advance about the rejection of a rate cut before year-end? The balance that is trying to find a Central Bank that credit growth is likely primarily consumer, which directly affect inflation will happen, but moderately, while interest rates on deposits, on the contrary, will not be reduced to a level that discourages savings.

All the way. But why give up free will in making decisions in the next three months? Especially when no one from the Central Bank was not expected. The power of the Bank of Russia just as possible to make decisions quickly.

Creates an involuntary impression that the regulator had been publicly exposed imposed on him a political compromise. He reluctantly went to the same reduced rates, but refused to do so in the remainder of the year. Of course, no one in CB will not confirm that such a compromise or pressure took place. The paradox, however, is that even the Central Bank acted without any regard for politics and in the upcoming Duma elections, she pre-announced a pause in the decline rate means that the Central Bank voted early. For the ruling party.

There is another important circumstance. Taking the decision to lower the interest rate of the Central Bank, certainly, predicted the imminent decision of the Federal reserve. If it were expected that the fed will raise rates, the Bank of Russia, most likely, would leave its rate unchanged in the face of growing turbulence on the foreign exchange market, which certainly would have caused a rise in the fed rate priority would be given to conservative politics.

But the latest stats from the United States, which stands out the dynamics of retail sales, reduces the chance of a rate hike by the fed. The volume of retail sales in August in the U.S. fell by 0.1% instead of expected growth by 0.4%. Moreover, the July figure was revised to decrease to -0.1% from 0.0%. Consumption – the basic element of the model of the U.S. economy, and its slowdown will not pass unnoticed by the fed, so that the new data push the rate hike.

That is a temporary corridor to the lack of additional risks incurred by the increase in fed rates (which is the strong dollar and lower oil prices) – would allow the Bank of Russia given the current dynamics of growth of domestic prices carry lower its key rate, without additional exchange rate risk.

The decision to abandon further rate cuts in 2016 means a rejection of this possibility. The market is now more than 50% are given for the increase in fed rates in December 2016. If this happens or if at the beginning of 2017, the fed and the Bank of Russia will almost simultaneously take opposite decisions: the Central Bank will take the rate lower, and the fed – up, that’s clearly not ease the position of the ruble, which will get an extra push down, and its impairment will have an impact on inflation. So the Central Bank may regret taken the pause. Although the policy dogmas should not be, and to explain why it should be changed once the decision, is a matter of technique.

Read the comments of Elvira Nabiullina.


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