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Friday, October 28, 2016

The Central Bank looks at the fed

The key rate of the Central Bank is reduced to 10%, and the immediate cause of this was the reduction of inflation, and to levels even lower than estimated. The Central Bank could go further even at this stage, however, he has clear concerns associated with the position of the US Federal reserve and the unpredictability of oil prices.

The Central Bank cut the key rate by 0.5% to 10%, in line with most forecasts of experts. The reason was a clear slowdown in inflation. A year ago, the Central Bank expected consumer price growth to around 7% in September 2016, however, the situation was even better in annual terms by 12 September inflation slowed down to 6.6%.

“The Central Bank decided to insure that in the adverse scenario of development of events to avoid panic in the Russian financial market”

“The rate was lowered, as during the period from June (last reduction) fell, the annual inflation rate to commensurate amount – from 7.3% to 6.9%. It turns out, reducing the rate today, the CBR retained the degree of rigidity of monetary policy. No decline would be tantamount to a tightening,” says Alexander kuptsikevich of FxPro.

Why the Russian Central Bank, in fact, did not go for monetary policy easing? The Russian regulator has reinsured, because it is not clear how it will behave with oil and global regulators, particularly the us Federal reserve. Next week will be the fed meeting, which can be decided on the rate increase. For Russia, this would be bad news. While 70% of experts polled by Reuters expect a rate hike by the Fed in December.

“A rate hike by FPS – this sale of shares, bonds and currencies of developing countries, including Russia. Accordingly, our Central Bank decided to insure that in the adverse scenario of development of events to avoid panic in the Russian financial market. In principle, the financial stabilization achieved, and therefore, nothing to prevent the Russian economy and with the current level of interest rates begin to rise,” – said the Director of “Alpari” Alexander Razuvaev.

The following steps

The Central Bank said next rate cut is worth the wait no earlier than the first or second quarter of 2017. By the end of 2016, the CBR expects inflation to 5.5-5.6 percent by the end of 2017 to the target level of 4%. In this case, the head of the Central Bank Elvira Nabiullina said that the key rate of the Bank of Russia may be higher than the inflation rate by more than 2.5-3 percentage points for some time after inflation in Russia will slow to 4%, but the exact formula for calculating this range. Now the difference between the rate and the inflation rate is 3.4 percentage points.

“There is no automatic formula 4 plus 2.5-3, because it depends on what processes will occur in the economy, and inflation, what are inflationary expectations, what will be the inflation risks. It was a level expected for the future after reaching 4%,” she explained.

Risks, says the head of the Central Bank that inflation could get stuck at the level of 5-6%. “We are confident that we will be able to reduce inflation to the target level even in case of realization of inflation risks. I would like to stress that our goal is to achieve one-time and sustainable results for inflation”, – said Nabiullina.

Russian economy moved to growth, but has not yet reached the stage of sustainable growth, said Nabiullina. The CBR has revised the GDP growth forecast for 2017. Now the regulator expects the GDP growth will not exceed 1%, while previously expected growth above 1%. The reasons for the preservation of the structural constraints and external risks. In 2018-2019 growth stabiliziruemost at 1.5-2%.

In the baseline forecast the Central Bank provides the average annual price of oil at $ 40 a barrel for the next three years, based on expectations of low growth in the global economy.

The effects of lower rates

The reduction of the key rates are traditionally supposed to influence rates on deposits and loans. However, major changes in the market hardly will follow. The Deputy Director of analytical Department of “Alpari” Anna Kokoreva waiting for lower interest rates on loans are not more than 0.5% in the next two months, for business and for people.

“Change of interest rate policy on deposits will primarily target the mass segment and lending segment of the retail and car loans,” – said the Director of the Department of lending and insurance products, “Absolut Bank” Anton Pavlov.

In his opinion, banks will not significantly reduce Deposit rates, as in the fourth quarter, they traditionally try to increase the portfolio of liabilities. As a rule, the lower the inflation, the lower the Deposit rates at a premium to the inflation rate 1-2 percentage points, “If in this year the inflation will remain within target value of 6.5%, the level of interest rates on deposits for the population will be 7.5%-8,5%. Next year, the target rate of inflation is 4%, therefore, rates can fall to 5% -6%,” – said Pavlov.

Financial analyst FxPro Alexander Kuptsikevich do not expect in short time to reduce interest rates on loans and deposits. Because today’s step of the CBR was expected, and the big banks played a proactive regulator, has previously reducing rates. A new movement in this direction can be counted only if inflation is unexpected to fall sharply, allowing the Central Bank to lower the rate, not next year, but before that, says Kuptsikevich.

In fact, due to the fact that the decision of the CBR was expected, the reduction of the key rate does not have a major impact on the ruble. “The markets have already been laid in quotes the decision, so it doesn’t have any impact on the ruble in the last few hours or the cost of short-term bonds significantly,” – says Kuptsikevich.

And here is a comment the Central Bank that further rate cuts can only be in the first or second quarter of 2017 should give the ruble some support in the winter months. Ruble-denominated assets (bonds for markets and deposits) will be a little more attractive than it was expected by the markets earlier, says Kuptsikevich. In recent years the winter, the ruble is not very good.

The main risk for a further decline lies in the unpredictability of oil. “If she doesn’t behave like one year and two years ago, that rate will be reduced already at the beginning of 2017,” – says Kuptsikevich.

From the perspective of macroeconomics the decline rate of the Central Bank can foster business growth and have positive impact on industrial production and GDP, says Kokoreva. As for the conservative attitude of the CBR in the Russian economy, the regulator has a good reason. “The budget deficit and the lack of access to Western sources of financing and low oil prices are slowing the economic recovery. In General, we agree that GDP growth in 2017 would be symbolic, and inflation may not reach the target of 4%,” – says Kokoreva. The Central Bank is more accurate in their forecasts, especially for inflation, in comparison not only with other Russian ministries and with international institutions, drew attention Kuptsikevich.


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